Dark Cloud Cover is a two-candlestick pattern formed when a bearish (black or red) candle opens above the close of the preceding bullish (white or green) candle and then closes below the midpoint of the bullish candle.

When you identify the Dark Cloud Cover pattern on a Japanese candlestick chart, it indicates a potential bearish reversal. This candlestick pattern is straightforward to recognize as its formation is indicative of its name.

At the conclusion of an uptrend (a “sunny day”), a black candle emerges (a “dark cloud”), signaling a possible trend reversal. The Dark Cloud Cover pattern is the inverse of the Piercing pattern, which represents a bullish reversal candlestick.

To identify a Dark Cloud Cover, look for the following criteria:

• A clear uptrend must be present.
• The pattern consists of two candles.
• The first candle in the pattern is a bullish candle (white or green).
• The second candle is a bearish candle (black or red) that follows the bullish candle.
• The black candle must penetrate the midpoint of the previous candle, opening above the high of the prior candle and closing more than halfway down the body of that candle.

Confirmation of the pattern occurs when another smaller black candle forms after the second candle.

The Dark Cloud Cover pattern can be visualized as a dark cloud overshadowing a bright, sunny day. When this pattern appears, it suggests that the bulls were in control due to the preceding uptrend.

The bulls continue to push prices higher after the open, resulting in a gap up, but then the bears take over. The price closes near the day's low, signaling the end of the uptrend. If the bears maintain control in the next candle, a reversal is likely.

Here are some tips for analyzing a Dark Cloud Cover pattern when you encounter one:

• The larger the gap up from the previous candle’s close, the more significant the reversal is likely to be, indicating that the market could not sustain that high price level.
• The longer the white and black candles are, the more pronounced the reversal will be.
• The lower the black candle closes into the white candle, the stronger the reversal will be.
• If the volume is high on both candles compared to previous candles, the likelihood of a reversal increases.

Ensure that the Dark Cloud Cover pattern you are observing is NOT a Bearish Engulfing pattern, as they can appear quite similar. If the second candle closes below the previous candle’s open, you are looking at a Bearish Engulfing pattern, not a Dark Cloud Cover pattern.