What Is Bearish Abandoned Baby?
A bearish abandoned baby is a specialized candlestick pattern consisting of three candles, one with rising prices, a second with holding prices, and a third with falling prices. Technical analysts expect that this pattern signals at least a short-term reversal in a currently upward trending price. The occurrence of this pattern is quite rare appearing approximately 50 times over the past two decades on S&P 500 stocks. The signal is usually followed by bearish performance over the short term.
- A bearish abandoned baby is a rare pattern that has a fairly strong track record for forecasting a short-term downward trend.
- The key item of the bearish abandoned baby is the middle day, which should have a gap in front of it and following it, and which should close the session with price unchanged.
- The bullish variation of the pattern is the bullish abandoned baby which is equally rare and also has a good track record for forecasting a reversal towards an upward trend.
Understanding Bearish Abandoned Babies
A bearish abandoned baby can be a signal for a downward reversal trend in the price of a security. This pattern is formed when a doji-like candle is preceded by a gap between its lowest price and that of the previous candlestick. The previous candlestick is a tall white candlestick with small shadows.
The doji is also followed by a gap between its lowest price and the highest price of the next candle. The next candlestick is a tall red candlestick with small shadows. In this pattern, the doji candle becomes an important signal for traders and technical analysts seeking to identify a bearish reversal of a bullish trend.
When this pattern occurs, price trends lower over the next 20 days about 65% of the time, with a median return of -3.00%, while the return for the benchmark S&P 500 index was positive for the same days.
In contrast to the rare bearish abandoned baby pattern, the equally rare bullish abandoned baby pattern, with a similar price structure, forecasts a bullish trend following its appearance.
Identifying both bearish and bullish abandoned baby patterns is done by recognizing the three main characteristics that make up these patterns: first, a prevailing trend; second, the proper sequence of candles; third, two gaps in price, the first one after the first candle and the second gap after the second candle.
- White candlestick: The white candlestick depicted in the graphics above occurs when a security’s price closes higher than its open. This type of candlestick is typically white or green on a trading chart. The particular example shown includes an opening price near the low for the day and a closing price near the high for the day.
- Red candlestick: The red candlestick depicted in the graphics above occurs when a security’s price closes lower than its open. This type of candlestick is typically black or red on a trading chart. The particular example shown includes an opening price near the high for the day and a closing price near the low for the day.
- Doji: A doji candlestick occurs when a security has the same open and closing price. This will typically be represented by some form of a plus sign on a trading chart, or perhaps a dash with a vertical line moving away from the dash.
Similar Patterns to Bearish Abandoned Baby
Both the bearish abandoned baby and the bullish abandoned baby are similar to the evening star and morning star formations. The difference that makes the abandoned baby patterns so rare is the occurrence of the doji candle with a gap on either side. The evening star and morning star formations do not require the middle candle to be a doji, or to have gaps on either side.
The name for this pattern, like many of the names of candlestick patterns, comes from a traditional usage among rice traders in Japan. Steve Nison is credited with first publishing this name in the popular press in 1991, though the name has been around in Japanese trading for centuries. This pattern is also similar to the bar-chart pattern known as an island reversal but with only a single candle.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.