Bearish Abandoned Baby Pattern: Bearish Reversal

The securities market works on the demand and supply and the stock prices move accordingly. There are tools and techniques used by traders and analysts to understand the possible price direction of securities. Analyzing the candlestick chart pattern is one technique traders apply in their daily life. A Candlestick chart pattern can indicate the direction of the price movement while signalling bullish, bearish or indecisiveness of the market sentiments.

A rarely occurring candlestick pattern is the bearish abandoned baby candlestick pattern. This articles details what is a bearish abandoned baby candlestick pattern.

Bearish Abandoned Baby Candlestick Pattern

Three consecutive candles–one with rising prices, the second with price stability, and the third with falling prices–form a bearish abandoned baby candlestick pattern. It is known to indicate at least a short-term reversal in a currently upward-trending price.

This pattern is among the rarest candlesticks to appear on a price chart but has a decent history of forecasting a short-term downtrend. It has appeared around 50 times in 20 years on S&P 500 stocks. However, whenever it has appeared, the security has seen a bearish performance in the short run. The contrasting variation of the bearish abandoned baby is the bullish abandoned baby which is also rare with strong indicators of bearish reversal.

The most prominent bearish abandoned baby pattern is formed when a Doji-liked candle leads up to a gap between its lowest price and that of the previous candlestick. The preceding candle is supposed to be a tall white candlestick with small shadows. The Doji is succeeded by a gap between its lowest and highest price of the next candle. The candles formed after this is a tall red candlestick with small wicks. A Doji is an important element in the identification of the bearish abandoned baby candlestick pattern for technical analysts and traders.

The bearish abandoned baby candlestick predicts a reversal of the downtrend and is often used as a signal to exit a long position and sell the securities by traders and analysts.

Historically, it has been seen that when the bearish abandoned baby candlestick pattern is formed, the security price trends lower about 65% of the time for around the next twenty days. The median return the security generates is -3.0% whereas the S&P 500 Index ends in positive.

How to identify Bearish Abandoned Pattern?

Locating a candlestick as rare as a bearish abandoned candlestick pattern can be tricky. Not just this one, its contrasting counterpart, the bullish abandoned candlestick pattern is rare too. Recognition of a bearish abandoned pattern includes three main characteristics that form the pattern:

1. The first one is a prevailing trend
2. The second is a proper sequence of candles
3. The third is the two gaps in the price

The gaps need to be after the first candle and the second candle, respectively. Important candlesticks involved in the formation of an abandoned baby include:

1. White candlestick: This is formed when the security price closes higher than its opening price. A white candlestick can also be seen as a green candle as per the software settings.

2. Red candlestick: A red candlestick is formed when the price closes lower than its opening price.

3. Doji: A Doji candlestick is formed when a stock has almost the same opening and closing price.

To identify a bearish abandoned baby pattern, look for:

• A large white (or green) candlestick in an uptrend
• The white candle must be followed by a Doji that gaps above the closing price of the first candle
• The last candle must be a black/red candlestick that opens below the previous, Doji