Bulkowski’s Dark Cloud Cover

Written and copyright © 2008-2009 by Thomas N. Bulkowski. All rights reserved.

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

Dark cloud cover is a two line candlestick that has poor reversal performance. Just 60% of the time, price changes direction from up to down in a bull market. However, once the turn is made and price breaks out, price trends, ranking 22nd out of 103 candle patterns, where 1 is best.

Important Results

Theoretical performance: Bearish reversal Tested performance: Bearish reversal 60% of the time Frequency rank: 46 Overall performance rank: 22 Best percentage meeting price target: 62% (bear market, down breakout) Best average move in 10 days: 5.36% (bear market, up breakout) Best 10-day performance rank: 19 (bull market, up breakout) All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

Dark Cloud Cover

Discussion

I like the name, dark cloud cover, but have trouble remembering it when I am searching for candles. Maybe it is because the pattern has a reputation as a reversal candle -- and it does reverse -- but nothing like the expectations. Just 60% of the time does a reversal occur.

The frequency rank is 46 out of 103, so it is about mid list in terms of showing in a historical price trend. Once it does appear, it ranks 22nd for performance and that means price has a tendency to trend after the breakout.

The best average move 10 days after the breakout belongs to dark cloud cover with upward breakouts in a bear market. Price climbs 5.36%. A good move would be 6%, so this is a bit short. The best performance rank after 10 days is 19th, which is quite good.

Identification Guidelines

Three Trading Tidbits

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

1. Dark cloud cover candles that appear within a third of the yearly low perform best -- page 185.
2. Dark cloud cover breaks out downward most often -- page 187-188.
3. Reversals occur most often within a third of the yearly low -- page 188.

Example

Dark cloud cover, circled in A, appears on the daily scale. Price moves in a brisk upward trend, forming a tall white candle. The next day, the clouds move in forming a black candle that begins the day with a higher open but closes below the middle of the white candle. The change from bullish to bearish occurs in just one candle. It also represents a trend change from up to down when price breaks out downward. That happens when price closes below the lowest low in the dark cloud cover. Thereafter, price trends lower in a comparatively smooth move downward.

Shown is not the preferred setup. The best setup for the dark cloud cover candlestick is for it to appear when price is trending lower. An upward retrace of that down move appears followed by dark cloud cover. It signals a reversal and when price breaks out downward, and the stock joins the downward primary trend already in existence. It is like a swimmer moving with the current turning against the current to avoid a buoy followed by a resumption of him swimming with the current.

-- Thomas Bulkowski