What is dark cloud cover?

The dark cloud cover is a candlestick pattern in technical analysis that indicates the end of an uptrend. In simple words, it is a bearish reversal pattern that signals a shift towards a downside. 

The appearance of a dark cloud cover indicates the possibility of a weakness in the uptrend. The pattern comprises a bearish candle that opens above the midpoint of a bullish candle but closes below the level. 

Identification of a dark cloud cover can be easily carried out by looking for a bullish candlestick that appears before a bearish candlestick, which in turn forms a “dark cloud” over the prior candle.

Dark cloud cover candlestick meaning

A dark cloud cover occurs when despite the price opening higher, sellers dominate buyers and drag the price lower later in the session, leading it to close sharply lower. 

In theory, the pattern indicates a reversal to a bearish trend, especially if it appears after an overall price rise. A bearish candlestick after the dark cloud cover usually confirms the occurrence of the pattern and trend reversal.

However, overall volatility is important. If the price action is generally volatile, the dark cloud cover may not necessarily indicate a downtrend since the price movement may pull back and wipe out the losses.  

How to trade dark cloud cover pattern

A dark cloud cover pattern is used to spot a trend reversal. The appearance of a downward price action after the dark cloud cover may be used by trend followers as a signal to exit long positions.

The formation of the pattern may be also used by traders in conjunction with other technical indicators for confirmation. 

Dark cloud cover pattern example

An example of using the dark cloud cover pattern alongside other technical analysis tools would be if a trader looks at the Relative Strength Index (RSI) of an asset to note if the security is overbought. An RSI reading of 70 or above signals the overbought territory and may indicate the likelihood of a trend reversal.  

If the trader then finds a dark cloud cover appearing for the security with an RSI reading of 70 or above, it can serve as a confirmation that the price shift towards a downtrend is likely. This data can be used to end a long position.