Bar Chart Analysis
Figure 7.22 Bullish Three‐Bar Reversal on the Daily Chart of TSX Composite Index.
Courtesy of Stockcharts.comIn Figure 7.22, we observe a three bar bullish reversal occurring on the dai-
ly chart of TSX Composite Index. Notice the large middle bar occurs on lower
volume as compared to the first bar, which is bullish. This pattern corresponds to
pattern 6 in Figure 7.9.Multiple Bar island reversals
In Figure 7.23, we see a bearish island formation occurring on overbought condi-
tions on the stochastic oscillator, on the daily chart of Direxion Daily Gold Min-
ers 3X Shares. Notice that the entire formation occurs on low volume, indicating
a lack of conviction by the market participants. The gap up is followed by a gap
down, isolating the formation.Outside Bars
Outside bars are bars that engulf one or more preceding bars. The preceding bars
are contained within the range of the outside bar. This pattern is generally consid-
ered a reversal pattern. The larger the outside bar, the more bullish or bearish will
be the signal for a reversal. Many practitioners also consider the outside bar as a
continuation pattern if the outside bar closes near or at the high, in the direction of
the existing uptrend. The larger the number of preceding bars that are contained or
encompassed within the range of the outside bar, the greater will be the tendency
for producing stronger breakouts. Outside bars should close at or near their high or
low for a more reliable reversal or continuation. The outside bar should also close
on high volume. This pattern is similar to engulfing patterns in Japanese candlestick
analysis. In Figure 7.24, we see a large bearish (a close in the opposite direction of
the uptrend) outside bar encompassing 11 preceding bars on the daily chart of ITC
Holdings Corp. An uptrend line violation coinciding with a bearish breakout of an
outside bar should provide a reliable signal for a short entry.