How To Catch A Bearish Reversal

In the article of How Catch a Bullish Reversal I talked about how important the trend is.  In this case we just need a down trend.  Down trends can be just as powerful a as an uptrend.  In some cases they can be faster and more explosive.  The old market adage is that the market goes up like an escalator and drops like and elevator.

I want to go over the basic characteristics of the down trend and show you what a bearish reversal would look like.

Again, lets establish  some rules to simplify where a reversal might occur.

Rules
Down trends are pretty easy to find if you know what to look for.  Lower highs and lower lows, the key in a downtrend is to wait for a rally.  This rally will begin to create a lower high as the bearish reversal begins.  When this happens it is important to execute on the signal.

Here is a checklist fo the set up

1. There needs to be a lower low
2. After the lower low a rally will need to happen
3. The reversal will begin to create a higher low

The reversal is key just like in the bullish reversal patterns.  This is the entry point, and this is based off of the bearish candlestick formation.  I am going to show you 3 basic candlestick formation to keep an eye out for.

• Bearish Dark Cloud - the dark cloud is a bearish formation that indicates heavy selling pressure.  Generally the price opens higher and during the day and then price drops to the middle of the previous days range
• Bearish Engulfing - Market is in a bull mood. Then we see diminished buying reflected by the short, white real body. This then is followed by a strong sell-off, which lead to a close at or below the previous day’s open. Apparently the uptrend has lost momentum and the bears may be gaining strength.
• Bearish Reversal -Bearish Reversal Pattern sends a strong signal suggesting that the market is now heading downward. The previous market direction was up and now selling pressure has set in. The price never entesr into the previous day's range and we have a open that can be in the previous days range or below it, and the close will be below the previous days range.

  Some traders will enter at this point or they wait a day for confirmation.  If you wait for more than 2 days its is most likely to late and you need to wait for a more appropriate entry signal.