I get it, the title is a little morbid, but how else do you introduce the Abandoned Baby candlestick pattern? You could call this pattern "Buddy" after the movie "Elf," but he was more of a stowaway. No matter how you view the price action today, it is a significant indication of support and the potential early move ahead of the traditional "Santa Claus rally."
Let's take a closer look at the Abandoned Baby (Bullish) candle pattern.
Abandoned Baby (Bullish) Basics
Overall Rating: 4 star
Directional Bias: Bullish Reversal
Number of Candles: 3
Frequency Rating: 1 Star
Pattern Description:
This pattern forms at the end of a downtrend. The pattern begins with a closed candle showing the price closing lower than the open. The next candle gaps down with no overlap of the shadows of the previous day and forms a doji. The third candle in the series gaps higher on the open and closes above the previous day’s low.
Volume Description:
Above average volume throughout the pattern with increased volume on the breakout outperforms.
Statistical Notes:
Taller patterns with larger real bodies or longer shadows typically perform better than shorter patterns (measured by taking the difference between the highest high and lowest low of the pattern).
Measuring Technique:
Add the height of the pattern from the high of the last candle.
Abandoned Baby Example
The example below is for the SPDR Dow Jones Industrial Average ETF Trust (NYSEARCA: DIA). Notice the separation or lack of overlap in the candles. The middle candle is literally "abandoned" as the price action reversed today. The result was an opening gap higher, with the price holding the gap level. The result, a larger closed candle, a gap with a small body, and a gap higher forming a longer open body. The one thing the DIA pattern lack is volume today on the reversal.
Conclusion
Abandoned Babies are effective candle patterns. These patterns are not only a indication of support, but can kick off a major reversal in the trend of the stock. Today's movement is an indication that the market may be poised to stay above it's recent support as we move into the new year, but may surprise with the upside as well.
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