What is a Piercing Line Pattern?
A Piercing Line is a two candlestick bullish reversal pattern, made up of a long red candle, followed by a long green candle. It is a reversal signal after a downtrend which indicates strong buying pressure.
What Does the Piercing Line Pattern Signal?
The Piercing Line pattern signals sellers pushing the price lower at the open forming a bearish candle and momentum all the way into the next candle where it opens with a gap down. From the gap down on, buyers then take control of the market as they push the price upwards beyond the price of the original downwards candle. The Piercing Line signals the bottom of a downtrend and that bulls are about to gain control over the market and appears in five criteria:
- Downtrend
- Bearish Candle
- Gap Down
- Bullish Candle
- Close above 50% of the previous day’s Bearish Candle
Trading a Piercing Line Pattern
Looking at this GBTC chart on a 1-hour time frame we can identify one piercing line potential reversal pattern. I say potential reversal pattern because on Friday on market open there was a gap down below the long-term uptrend and instantly reversed by a piercing line pattern. From here, the price could continue this reversal upwards towards a retest of this uptrend.
Looking at this chart of MSFT on a 4-hour time frame we can identify a piercing line pattern followed by a trend reversal. After MSFT had their dividend day and the price found a high at $232, a downtrend swiftly followed until there was a piercing line reversal at the bottom. This piercing line is a little different because theres two candles in the exact same spot, almost like a duplicate, but the 3rd one is what really completes the piercing line pattern and reverses the trend to the upside.
Differences Between a Dark Cloud Cover and a Piercing Line Pattern
A Dark Cloud Cover and a Piercing Line pattern are essentially the same pattern but polar opposites. A Dark Cloud Cover appears at the top of an uptrend while a Piercing Line appears at the bottom of a downtrend. A Dark Cloud indicates bearish momentum while a Piercing Line indicates bullish momentum.
Limitations of the Piercing Line Pattern
Traders shouldn’t rely their trades solely based on candlestick patterns such as the Piercing Line. Traders when trading this pattern should look for a relative strength index (RSI) value lower than 30 to check if the asset is oversold. This provides confirmation that the asset is oversold and the Piercing Line is a valid indicator of a reversal upwards forming a bull market.
