Bullish Harami Candlestick Pattern

The bullish harami is a two candlestick trend change signal that is potentially bullish if it occurs after a downtrend. According to Nison (1991, p. 80), the harami pattern is not as significant a reversal pattern as an engulfing pattern or hammer. A harami pattern is made up of a large candlestick followed by a small candlestick whose real body is between the real body of the first day’s large candlestick real body. During a downtrend, the real body of the first day is bearish and the small real body of the second day is bullish, but can be bearish as well. Nison (1994, p. 88) explains that after a downtrend, when the second day’s small real body candlestick is toward the bottom of the first day’s real body, it is called a low-price harami.

A related pattern is the three inside up pattern that is found at bottoms. The three inside up pattern is a confirmed bullish harami pattern where the first day is a bearish candlestick followed by a small body bullish candlestick where its price range is within the first day’s real body. The third candlestick is a bullish candle that opens within or above the real body of the second day and then closes above the high of the first day’s bearish candlestick. A less demanding form of the pattern requires that the third day close above the close of the second day’s candlestick.

Bullish Harami Cross Candlestick Pattern

A harami cross occurs when the second day is a doji rather than a small bullish or bearish real body. Nison (1991, p. 80) states that the harami cross should be viewed as a major reversal signal. Though the harami cross can occur after a downtrend, Nison suggests that the harami cross is more effective at tops (1991, p. 86).

Psychology of Bullish Harami

The significance of a harami pattern is illustrated next. During a downtrend a long bearish candlestick emerges, which reinforces that the bears are still in charge. Nevertheless, on the second day, rather than heading lower, which a trader would expect if the bears were still in charge, the price gaps higher. During the second day, the price moves slightly up and down, suggesting that neither the bears nor bulls are in charge. This indecision of the harami pattern suggests that prices could move sideways or could reverse upward because the bears’ downward move has been exhausted.

Traits that Increase a Bullish Harami's Effectiveness

Nison (1994, p. 87) gives important traits that increase a bullish harami’s importance:

• The more the real body of the second day is at the midpoint of the first day’s real body, the better the reversal of the trend. However, following a downtrend when the second day’s small real body candlestick is toward the bottom area of the first day’s candlestick real body, the greater the chance of consolidation rather than a reversal upward.
• The more the open, high, low, and close are within the prior day’s real body, the greater the chance of reversal.
• The smaller the shadows and real body of the second day and thus the more like a doji the second day is, the higher the probability of a full reversal.

Blended Candle Analysis of Bullish Harami = Hammer

Using blended candle analysis where the two days of the bullish harami pattern are combined into one day (open of day 1 candle to close of day 2 candle) is equivelent to a one candle hammer candlestick. The hammer is a bottom reversal candlestick pattern.

Harami Pattern Downtrend Consolidation and Support Example

After a multi-week rolling downward trend on the chart above of Intel Corporation (INTC), two large bearish candlesticks appeared pushing prices to a new low for the trend. However, the bears pushed too hard and the following day, the second day of the harami, gapped up. This small bullish candlestick of the second day of the harami pattern told traders that a change in trend could be happening. The day after the harami pattern, another bullish candlestick appeared and gave greater evidence that either prices would be consolidating or moving higher. On the seventh and ninth day after the harami pattern, the candlesticks tested and confirmed the support line established by the close of the bearish candlestick of the first day of the harami pattern.

Harami Cross Bottom Example

The chart above of the Gold ETF (GLD) shows an excellent example of the harami cross at a bottom. The chart illustrates a four day dramatic move downward, with a very large bearish candlestick on the fourth day. The following day’s doji that gapped higher to the midpoint of the large bearish candlestick suggests that the bears overshot themselves downward and that sentiment had radically changed the next day (the day the doji occurred). The large bearish candlestick established an area of support at its closing price that was confirmed weeks and months later.

Works Referenced

1. Nison, S. (2003) The Candlestick Course. Hoboken: John Wiley & Sons.
2. Nison, S. (1994) Beyond Candlesticks: New Japanese Charting Techniques Revealed. New York: John Wiley & Sons.
3. Nison, S. (1991) Japanese Candlestick Charting Techniques. New York: New York Institute of Finance.
4. Rhoads, R. (2008) Candlestick Charting For Dummies. Hoboken: Wiley Publishing.
5. ThinkorSwim. (2011). ThinkorSwim Resource Center: Candlestick Patterns Library.