What is the Stalled Candlestick Pattern?

As the stock market follows a certain trend, it becomes difficult to know when the current trend may reverse. In the case of a bullish trend where the prices of securities rise consistently, an investor may hold the securities to earn better profits based on the positive price action. However, if the market trend reverses, which only takes a few days, the investor may see the profits vanish by a massive margin.

Experienced investors find the best entry and exit points through the technical analysis process, where they look at a stocks’ historical data and charts to predict the future price movement. One of the most widely used parameters in the process is Candlestick charts and a pattern known as stalled candlestick pattern.

Candlestick charts and their related terms

If you have ever looked at a chart or graph of stock, you would have seen what looks like coloured candles positioned at various places. These are called candlesticks, and the chart you are looking at is called the candlestick chart.

Candlesticks visually represent the size of the price fluctuations of a specific stock. Investors use these candlesticks to understand where the market is going (market trend) based on the price fluctuations and help them predict the trend reversal (when the current trend will be reversed). Each candle has three parts:

• The Body
• The Upper Shadow
• The Lower Shadow

The body is either of green or red colour and has four points of data:

• Open: The first trade during the represented period.
• High: The highest traded price.
• Low: The lowest traded price.
• Close:The last trade during the represented period.

What is a Stalled Candlestick Pattern?

A stalled candlestick pattern is a candlestick chart pattern that indicates a likely reversal of the current bullish trend. The stalled candlestick pattern occurs at the time when the securities market is showing a bull trend (the prices of securities are rising) and indicates that the current increase in prices may fall due to the start of a bearish trend. The stalled candlestick pattern is a bearish reversal candlestick pattern which is also called a deliberation pattern.

The stalled candlestick pattern is a three-bar pattern and, in most cases, predicts the trend reversal when the market is in an uptrend. However, the stalled candlestick pattern is sometimes also seen at the time of a downtrend to indicate a bullish reversal and that the securities’ prices are likely to increase in the coming days.

Understanding the Stalled Candlestick Pattern

The stalled candlestick pattern includes three white candles and must follow the below criteria to indicate a bearish reversal:

• The opening and closing price of each candle should be higher than that of the previously stalled candlestick.
• The real body of the third candle should be shorter than the other two candles.
• The third candle should have a tall upper shadow, with the open being near the close of the second candle.

When looking at a stalled candlestick pattern, the wide part of the candle is referred to as the real body. It is responsible for indicating the range between the opening price and closing prices of specific security over a specific period. To fulfil the criteria of being a stalled candlestick pattern, the real body should be white, indicating a rise in the prices of securities and that the closing price was higher than the opening price. However, if the real body is black or red, it means that the security's closing price was lower than the opening price.

What does the Stalled Candlestick Pattern

The identification of the stalled candlestick pattern doesn’t always indicate a bearish reversal. The only possible situation where the stalled candlestick pattern will indicate the bearish reversal is when the candle showing the stalled candlestick pattern moves below the middle of the second candle’s real body. When this happens, traders know that they should consider cutting their losses as the prices of the securities are likely to fall in the coming days.

The stalled candlestick pattern suggests that the bull’s strength is temporarily exhausted and that the investor sentiment has turned negative. When the market is in a bull run, the prices of stocks rise consistently, with the investors holding the positions for better profits. However, as the market can not always rise daily, investors and traders are on the lookout for trend reversal. Trend reversal is a situation where the current market trend goes in the opposite direction.

When investors identify the stalled candlestick pattern during a bull run, they know that the prices of the securities will fall in the coming days as investors will likely sell their positions to realise profits. When identified, it is the best time for the investors to sell and ensure they cut their losses.

What price action is represented by the Stalled Candlestick Pattern?

The main aim of the candlestick pattern is to predict the future of the market trend in the coming days. They are formed by price actions that are sometimes negative (falling) and positive (increasing) the other times. However, some candlestick patterns, such as the stalled candlestick pattern, are widely used by investors and traders to identify the signals and the market's future direction.

The stalled candlestick pattern is formed by three continuous bullish candles to indicate that the current market is in an uptrend. The first two candles are relatively long, suggesting that the market still has buyer strength where investors are willing to buy new securities. However, these long candles also indicate the potential of exhaustion and that the investor sentiment has turned negative. It is not until the third candle is identified that the investors know for sure the market's future direction.

The third candle can sit or gap up on the shoulder of the second candle and is shorter than the first two candles. This is the candle that officially forms the stalled candlestick pattern and confidently indicates that exhaustion of the current bullish trend has happened, and the coming days will head towards a bearish direction. It is important to do other analyses along with the stalled candlestick pattern to ensure that the results are in line with the results of other technical indicators.

Stalled Pattern Example

The shares of XYZ are trading at a current market price of Rs 150. As the market is in a bullish trend, the price of XYZ has increased from Rs 75 to the current Rs 150 in a month. The price increase is owed to the current bullish trend the market is experiencing. However, when looking at the candlestick pattern of the stock, an investor sees the following criteria:

• Three continuous bullish candlesticks with consecutive higher high closes.
• The first two candlesticks are green and make a new high, followed by a third green candlestick that is shorter than the first two.
• The last green candlestick is either rising on the shoulder of the real body, which is long green or is gapping away from the last longer green body.

Once the investor identifies the above three points, it means that the stock has formed a stalled candlestick pattern. Since the identification means that the current bullish market trend is going to reverse, it indicates that the stock of XYZ has reached its exhaustion point. From hereon, the current market price of Rs 150 is likely to decrease. The investor who is holding the stock from Rs 75 levels to the current 150 level will most likely sell the position to realise profits and ensure they don’t make any losses if the trend reverses based on the stalled candlestick pattern.

Final Word

The stalled candlestick pattern is a great way to identify ideal entry and exit points by understanding when the bullish trend has reached its exhaustion point and is likely to reverse. However, since the candlestick patterns may result in false information, it is always better to simultaneously use other technical indicators to check the validity of the results furnished by the stalled candlestick pattern. This can help you better analyse stocks and ensure you make good profits and reduce the possibility of losses.