Patterns/ Two candles

Two candles 6 min read

Piercing line

A long down candle, then an up candle that opens below its low and closes more than halfway back up into it. A weaker cousin of the bullish engulfing — and the half-measure is the whole point of the definition.

What the shape is

Two candles, with three conditions:

  • The first is a long down candle.
  • The second opens below the first candle's low — a gap down, or an open at the session's worst level.
  • The second closes above the midpoint of the first candle's body, but not above its open. Close above the open and it is a bullish engulfing instead.

The sequence describes a session that began in capitulation and ended in recovery. Sellers got the opening they wanted and could not hold it; by the close, more than half of the previous day's damage had been undone.

The midpoint rule is the part people skip, and it is the part doing the work. A second candle that recovers a quarter of the first is not a piercing line — it is a bounce, and bounces happen in every decline.

When it means something

A piercing line that stuckIllustrative
The second candle opens beneath everything and closes well up inside the first body. The periods after it hold above the low rather than drifting back through it — which is the difference between a recovery and a pause.

What makes the open-below-the-low condition worth having is that it rules out the lazy version. A session that opens weak, trades weaker, then closes strong involved a genuine change of hands during the day. A session that simply opens mid-range and drifts up did not.

The same shape, meaning nothing

The same two candles, in a decline that continuedIllustrative
Open below the low, close past the midpoint — the definition is satisfied exactly. Then the fall resumed and took out the low within a few periods. Sustained declines produce convincing one-day recoveries regularly; that is what makes them sustained rather than vertical.

Telling them apart

  • Measure the midpoint honestly. Most things labelled piercing lines do not clear it. If it does not, the pattern is not there.
  • Does the second candle's low hold? That low is where the claim fails, and it is a specific, checkable price.
  • How far into the decline is it? The first recovery attempt of a fall is usually just the first of several.
  • How does it compare to a bullish engulfing? If the second candle had closed above the first's open it would be the stronger pattern. It did not. That is information, not a technicality.
The honest summary

A piercing line is a bullish engulfing that fell short, and it should be read as the weaker signal that it is. The two conditions people skip — opening below the prior low, and closing past the midpoint — are the only things separating it from an ordinary bounce.

Terms used

Piercing line
A down candle followed by an up candle opening below its low and closing past the midpoint of its body.
Midpoint
Halfway between the open and close of the first candle's body.
Gap down
Opening below the previous period's low.
Capitulation
Selling driven by the need to be out rather than by a view on value.

Patterns are the easy half

Reading the chart underneath them is the part that decides whether any of this is useful. The Charts track works through levels, volume, trend and timeframes from the beginning.

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