What goes up, must come down…right? With stocks that’s generally the case and for the Three Outside Down candle pattern that is the signal. The idea of an outside day resulting in a downside move is a strong indication of a potential move lower. With the market near highs and wavering, this pattern may be what the doctor ordered for a bearish signal.
Let’s take a closer look at the Three Outside Down candle pattern.
Three Outside Down Basics
Overall Rating: 3 Star
Directional Bias: Bearish Reversal
Number of Candles: 3
Frequency Rating: 4 Star
Pattern Description:
The Three Outside Down pattern occurs at the end of an uptrend. The pattern starts with an open candle followed by a long bodied closed candle whose body engulfs the body of the previous candle. The pattern completes with a lower close the next day.
Volume Description:
Falling volume during the formation of the Three Outside Down pattern with higher volume on the breakout increases performance.
Statistical Notes:
Taller Three Outside Down patterns with long bodies occurring in a neutral or bearish primary trend increase performance.
Measuring Technique:
Subtract the trading range of the pattern from the close of the last candle.
Conclusion
With the market near highs, many stocks may be setting up for bearish reversals. Using the Three Outside Down candle pattern and others may give you the edge you’re looking for on your bearish entries.
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