Definition:
“Above The Stomach Candlestick Pattern consists of a bearish day followed by a bullish day where the close is higher than the previous day’s open but below its close.” The Above The Stomach pattern signals a potential bullish reversal after a decline, hinting at a shift in market sentiment.
How to Identify the Above The Stomach Candlestick Pattern on a Chart:
- Prior Trend: Look for a preceding downtrend. This pattern is significant after a decline.
- First Candle: Identify a bearish candle (typically a long one) which reflects the continuation of the downtrend.
- Second Candle:
- It should be a bullish candle.
- The open of this candle should be lower than the close of the previous bearish candle, indicating that sellers pushed the price down further.
- The close of the bullish candle should be higher than the open of the previous bearish candle but should remain below its close. This suggests buying pressure has returned, but not with enough strength to fully negate the previous day’s decline.
- Volume Consideration: Though not mandatory, a rise in volume on the second day (bullish candle) can provide further validation to the pattern, indicating strong buying interest.
- Relative Sizes: The first bearish candle should be noticeably larger than average, signifying strong selling pressure. The bullish candle should also be relatively large, emphasizing the reversal momentum.
By following these steps, traders can spot the Above The Stomach pattern on their charts, giving them insight into potential bullish reversals.
Significance and Indications of the Above The Stomach Candlestick Pattern:
1. Reversal Signal: The Above The Stomach pattern primarily functions as a bullish reversal signal. Its appearance after a pronounced downtrend indicates a possible shift in sentiment. The first bearish candle confirms the existing bearish sentiment, while the second bullish candle hints that buyers are stepping back into the market with vigor.
2. Strength of Buying Momentum: The specific structure of this pattern — with the second candle’s close above the first candle’s open but below its close — underscores a delicate balance between buyers and sellers. While the buyers have returned, they haven’t completely overridden the bearish sentiment. This offers traders a nuanced view of the market, suggesting potential caution even in the face of a potential reversal.
3. Confirmation is Crucial: For professional traders, while the Above The Stomach pattern indicates a bullish reversal, acting on this signal without further confirmation can be risky. Many traders await additional bullish signals or patterns in subsequent sessions, or use complementary technical indicators, to ensure that the reversal is genuine and not a trap.
4. Beneficial for Risk Management: For traders, especially those new to the game, recognizing patterns like Above The Stomach can be a pivotal aspect of risk management. When spotted, it can serve as a cue to tighten stop-loss orders or consider taking bullish positions, always weighing the potential risks and rewards in the ever-unpredictable market.
Activity of Big Traders During the Formation of the Above The Stomach Candlestick Pattern:
1. Liquidation & Position Covering: When the first bearish candle of the Above The Stomach pattern forms, it often signifies the culmination of a downward trend influenced by institutional and big traders offloading positions or short-selling. Their activities can exert significant downward pressure on prices. The sheer volume and force behind such moves by these big players are often responsible for the pronounced bearish candles we observe.
2. Accumulation & Entry Points: The second bullish candle provides an interesting insight. The opening below the previous day’s close indicates that institutional players may still be wary or continue their bearish stance initially. However, as the day progresses and the candle turns bullish, it suggests that big traders might view the current price as an attractive entry point or deem the asset undervalued. They start accumulating, resulting in the price rise reflected in the bullish candle. This accumulation phase can be seen as ‘smart money’ finding value and slowly entering the market.
3. Test of Market Sentiment: The fact that the bullish candle closes above the open of the preceding bearish candle, but not above its close, provides an indication that big traders are still testing the waters. They might be partially accumulating but are also cautious, awaiting further confirmation of a trend reversal. This can be a strategic move to avoid prematurely committing to a full position before the market sentiment is clear.
4. Order Flow Dynamics: Behind the scenes, order flow can give additional insights. If during the formation of the bullish candle, there’s a noticeable increase in buying volume or large block trades at higher prices, it might indicate institutional buying. Conversely, if the volume is thin but the price is still rising, it may suggest that selling pressure has decreased, and big traders are holding back, waiting for further developments.
For retail traders, understanding the activity of big traders during such patterns can offer a strategic edge. By gauging the potential moves of institutional players, they can position themselves more effectively, aligning with the larger currents of the market rather than being swept away by them.
Confirmation Tools for the Above The Stomach Candlestick Pattern:
| Tool | Description |
|---|---|
| Key Level | Identify significant support or resistance levels near the pattern. A bounce from a key support level after the formation of the pattern can reinforce the reversal signal. Similarly, if the pattern forms near a resistance and doesn’t break through, it may warrant caution. |
| Break of Low | Monitor for a break below the low of the bullish candle after the pattern forms. If the price breaks below, it could indicate the continuation of the bearish trend, questioning the pattern’s bullish reversal signal. |
| Volume Analysis | High volume during the bullish candle’s formation suggests strong buying interest, reinforcing the reversal signal. On the other hand, low volume might indicate a lack of conviction in the potential reversal. |
| Technical Indicators | Use oscillators like the RSI or the Stochastic to identify oversold conditions during the pattern formation. An oversold reading followed by a bullish divergence can serve as a strong confirmation of a potential upward reversal. |
For retail traders, leveraging multiple confirmation tools alongside the Above The Stomach pattern can enhance decision-making, adding layers of validation to potential trade setups.
Trading Insights for the Above The Stomach Candlestick Pattern:
Best Timeframe: The daily timeframe tends to be optimal for this pattern, capturing enough market sentiment while filtering out intraday noise. This allows traders to discern genuine reversals from false signals.
Trading Session: The pattern is most reliable when observed during the major market sessions such as the New York or London sessions. These periods typically witness higher liquidity and greater institutional activity, which underpin the pattern’s significance.
Approximate Winning Ratio: While the exact winning ratio can vary based on the broader market context and specific asset, with proper confirmation tools, traders can expect a winning ratio of around 60-65%. It’s essential to factor in risk management and not solely rely on the pattern’s success rate.
Remember, these insights serve as general guidelines, and it’s crucial for traders to backtest the pattern on their chosen instruments and refine strategies based on empirical data.
Trading Strategy with Confluence for the Above The Stomach Candlestick Pattern:
Entry: Wait for the formation of the Above The Stomach pattern and then look for confluence with other technical tools. For instance, if the bullish candle of the pattern bounces off a significant support level or a moving average, it strengthens the bullish reversal signal. Enter a long trade on the opening of the next candle after these confirmations.
Stop-Loss: Place the stop-loss just below the low of the bullish candle in the pattern. This ensures that if the bullish reversal does not materialize and the price continues to decline, your potential loss is limited.
Take Profit Level: Identify nearby resistance levels or previous swing highs as potential targets. Another approach is to aim for a risk-to-reward ratio of at least 1:2 or 1:3. This means if you’re risking 10 pips with your stop-loss, set your take profit at 20 or 30 pips.
Conclusion:
The Above The Stomach pattern offers traders a potential early signal of a bullish reversal in a downtrend. However, as with all candlestick patterns, its predictive power increases when combined with other technical tools and confluence factors. The addition of key levels, volume analysis, and technical indicators can provide the necessary validation for more confident trading decisions. Always prioritize risk management and ensure that the potential reward justifies the risk taken.
