Often times when price reaches an inflection point, there is a degree of balance that is exhibited in the price. However, that is not the case with the Separating Lines candle pattern. In this bearish case, the price is reaching a euphoric peak before quickly falling into the valley. This sharp reversal is a quick indication that the bears have established control.
Separating Lines (Bearish) Basics
Seeing a Marubozu candle form in a downtrend is an indication of support. The tall open body with little to no shadows is an indication that the bulls have established control. That control may cause you to believe that the price is heading higher, but within the context of a downtrend, the bullish posture is precarious. The precarious bullish position is quickly confirmed as the price gaps lower and continues to sell-off. The bearish reversal providing a continuation in the bearish overall trend. The opening gap lower to the previous day’s open and the continued selling erases any bullish memory that traders had from the day before.
Overall Rating: 3 Star
Directional Bias: Bearish Continuation
Number of Candles: 2
Frequency Rating: 3 Star
Pattern Description:
The Separating Lines pattern occurs within a downtrend. The first candle of the formation is a tall open candle. The next candle gaps down near the previous day’s open and continues to sell off forming a tall, closed candle.
Volume Description:
Falling volume during the formation of the Separating Lines pattern with higher volume on the breakout increases performance.
Statistical Notes:
Taller Separating Lines patterns with long bodies or shadows that occur in a neutral or bearish primary trend increase performance.
Measuring Technique:
Subtract the trading range of the pattern from the close of second candle.
Conclusion
The bearish Separating Lines setup can be a quick confirmation of resistance in a downtrend. The strong indication of exhaustion on the part of the buyers is indicative of a continuation of the trend. The fact that the price quickly gaps to the previous day’s open and fails to find support erases any trace of bullish memory from the previous day’s bullish move.
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