If there is one thing that the current market is providing, it’s a lot of rarities. With today’s gap and tomorrow’s employment report, the potential that Abandoned Baby candle patterns may appear in abundance is pretty high. With so many stocks that have gapped and are forming tight ranges and small real bodies, a gap down tomorrow could complete an otherwise rare pattern.
Abandoned Baby Basics
This is a 3-candle pattern that provides a significant indication of exhaustion. The pattern begins with an up day, followed by a gap in the price, the formation of a small real body and then a gap down. The concept of being “abandoned” is that there isn’t overlap by the bodies and ideally the shadows of the two candles encompassing the “baby.” One symbol to watch tomorrow is the Financial Select Sector SPDR Fund (NYSEARCA: XLF).
Overall Rating: 2 Star
Directional Bias: Bearish Reversal
Number of Candles: 3
Frequency Rating: 1 Star
Pattern Description:
The Abandoned Baby pattern forms at the end of an uptrend. The pattern begins with an open candle showing the price closing higher than the open. The next candle gaps up with no overlap of the shadows of the previous day and forms a doji. The third candle in the series gaps lower on the open and closes below the previous day’s low.
Volume Description:
Volume should diminish throughout the Abandoned Baby pattern and expand on the breakout.
Statistical Notes:
The Abandoned Baby pattern performs better when the price is trading in in more of a neutral trading range or within a primary downtrend. Taller patterns typically perform better than shorter patterns (measured by taking the difference between the highest high and lowest low of the pattern).
Measuring Technique:
Subtract the height of the pattern from the low of the last candle.
Conclusion
While Abandoned Baby’s are the most common or reliable pattern, it is a significant indication of exhaustion. The resistance that it establishes is significant even if the follow-through to the downside isn’t always robust. However, if we see the market open lower tomorrow, we may see this pattern in abundance.
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