Dark Cloud Cover: Definition, Significance, and How to Trade It

Key takeaways

• Dark Cloud Cover is a bearish candlestick reversal pattern that signals a potential shift from an uptrend to a downtrend.
• It consists of an up (bullish) candle followed by a down (bearish) candle that opens above the prior close but closes below the midpoint of the prior candle.
• The pattern is more meaningful after a clear uptrend and when both candles have relatively large real bodies.
• Traders typically wait for confirmation on the next candle and use stops above the bearish candle’s high.

What is a Dark Cloud Cover?

A Dark Cloud Cover is a two‑candlestick bearish reversal pattern. After an established uptrend, a bullish candle is followed by a bearish candle that gaps up at the open but then sells off and closes below the midpoint of the previous bullish candle. The pattern reflects a change in intraday control from buyers to sellers and can precede further downside.

How the pattern forms

• Session 1: A bullish candle (large real body) continuing an uptrend.
• Session 2: Price opens above the prior close (gap up), suggesting further upside, but sellers dominate and push the close below the prior candle’s midpoint, creating the bearish candle.

Large real bodies and small shadows strengthen the signal because they indicate decisive buying followed by decisive selling.

Criteria for a valid Dark Cloud Cover

1. Existing bullish uptrend.
2. A sizable bullish candle within that uptrend.
3. A gap up on the next period’s open.
4. The following candle turns bearish.
5. The bearish candle closes below the midpoint of the previous bullish candle.

If candles are small or price action is choppy, the pattern is less reliable.

Interpretation and confirmation

• The pattern suggests momentum is shifting from buyers to sellers.
• Confirmation is typically sought on the next candle: another bearish candle or a breakdown of key support increases the likelihood of a sustained decline.
• Failure to see follow‑through or a quick reversal back above the bearish candle’s midpoint reduces its reliability.

Trading rules and risk management

• Entry: Consider entering short on the close of the bearish candle or on the next period after confirmation. Conservative traders may wait for a breakdown below nearby support.
• Stop loss: Place a stop above the high of the bearish candle (or above the confirmation candle’s high after confirmation).
• Profit target: The pattern itself doesn’t define a target. Use support levels, measured moves, trailing stops, or other technical tools to set exits.
• Exits for longs: Traders holding long positions may exit near the bearish candle’s close or on the confirmation day.

Combining with other analysis

Enhance reliability by combining the pattern with:
* Overbought indicators (e.g., RSI > 70)
Breaks of trendlines or key support levels
Volume showing heavier selling on the bearish candle

Example (summary)

In a documented example on a leveraged volatility ETN, a Dark Cloud Cover formed when a bearish candle opened above the previous candle and closed below its midpoint. The next session confirmed the reversal with a nearly 7% drop, validating the pattern and giving a clear short entry and stop placement.

Limitations

• Not every Dark Cloud Cover results in a significant reversal—false signals occur, especially in volatile or sideways markets.
• Use position sizing and risk controls; pair the pattern with other technical context for higher-probability trades.

Conclusion

Dark Cloud Cover is a straightforward bearish reversal signal that, when appearing after an uptrend and accompanied by confirmation, can provide practical entries and stop locations for traders. As with any single pattern, it works best when combined with broader technical analysis and disciplined risk management.