A:

The piercing pattern candlestick formation is considered by traders and analysts to be a very reliable bullish market reversal indicator, essentially in the same class as the bullish engulfing pattern and hammer up pattern. The piercing pattern, commonly occurring at the end of a sustained downtrend or corrective pullback in an overall uptrend, is formed by two candles headed strongly in opposite directions, the first one down and the second one up. The initial candle is a large down candle that closes near its low. The second candle gaps lower, and then moves strongly higher throughout the trading session to close above the midpoint of the first candle's body. The pattern is sometimes called the "piercing line" pattern, referring to it piercing through the price line that lies at the halfway point of the first candle.

This pattern is considered a strong market reversal signal because, it reveals a rejection of lower prices, indicated by the failure of the lower open of the second candle, and a distinct change to buying strength, indicated by the second candle's strong upward close. The two candles provide an easy visual assessment of a shift in market sentiment. Effective trade entries are possible because the formation provides the opportunity to enter the market with limited risk and excellent profit potential. Trade entries based on the pattern only risk price falling to the low established by the pattern's formation; a new low occurring constitutes a negation of the bullish market reversal signal.

One technical indicator traders and analysts consider as confirming the pattern's bullish signal is volume. The pattern's signal is significantly strengthened if market action shows relatively low volume during the first candle's formation, followed by a sharp increase in volume during the trading action that results in the formation of the second candle. The volume shift confirms waning interest by sellers and surging interest on the part of buyers.

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