What is a Piercing Pattern
A piercing pattern is a technical trading signal that is formed by a closing down day with a good-sized trading range, followed by a trading gap lower the following day with a white candlestick that covers at least half of the upward length of the previous day's red candlestick body, finishing with a close higher for the day. A piercing pattern often signals the end of a small to moderate downward trend.
BREAKING DOWN Piercing Pattern
A piercing pattern can serve as a potential indicator for a bullish reversal.
Piercing Pattern Formation
A piercing pattern is one of a few important candlestick patterns that technical analysts typically spot on a price series chart. This pattern is formed by two consecutive candlestick marks. The first candlestick is red/black signifying a down day and the second is white/green signifying an up day. When a trader is watching for a bullish reversal any red candlestick followed by a white candlestick could be an alert.
There are a few things that set a piercing pattern apart from a general red candlestick white candlestick pattern. In a piercing pattern, a white candlestick follows a red candlestick with a significant gap in the red candlestick close and white candlestick open. On the second day white candlestick, the candlestick’s body must also lengthen to cover at least half of the previous day’s red candlestick. Generally, the gap down and substantial increase to the closing price are good signs for a reversal. In a piercing pattern the second day white candlestick will close at or above the midpoint of the previous day’s red candlestick.
Piercing Pattern Indications
A piercing pattern is known in technical analysis to be a potential signal for a bullish reversal. The second day’s white candlestick rebound from a down gap to a midpoint closing high is expected to be a sign that a support level has been reached. Thus, a piercing pattern can be further confirmed if it occurs at the support trendline of a price channel. A piercing pattern is typically only a potential signal for reversal so following a piercing pattern a trader would want to watch for a breakaway gap.
A breakaway gap is a pattern that occurs in the first phase of a reversal. It is identified by two consecutive white candlesticks with a second day white candlestick that shows a substantial gap higher from the first day’s closing price to the second day’s opening price. A piercing pattern followed by a breakaway gap can be a strong affirmation that a reversal is occurring.
In a bullish reversal, traders generally have two popular options. They can buy the stock to benefit from the uptrend. They may also choose to by an in the money call option with a strike price below the current market price.