The Piercing Pattern is a trend reversal pattern that appears at the bottom of a downtrend. The candlestick on the first day is a long bearish candlestick and the second candlestick is long bullish candlestick. The second day candlestick opens below the previous day’s low and ends up closing within the price range of the previous day’s real body. It is a firm rule that the bullish candlestick should penetrate and close more than 50% into the previous day’s real body (Nison, 1991, p. 49). For those familiar with the bullish engulfing pattern, the piercing pattern is essentially an incomplete bullish engulfing pattern, since a bullish engulfing pattern’s second day bullish candlestick penetrates and closes more than 100% past the real body of the first day’s bearish candlestick.
With the piercing pattern, the large bearish candlestick confirms the previous downtrend and makes a new low. The next day the price gaps downward making yet another new low, thus far the bears have dominated. Nevertheless, instead of the price continuing to go lower, the price begins to rise and rises so far that it ends up erasing over half of the bears’ movement downward on the bearish candle on the previous day. Essentially the new lows of the previous downtrend have been rejected, and the bulls are ready for a new run higher.
The piercing pattern is voided if future candlesticks go below the second day bullish candlestick low.
The opposite of the piercing pattern is the dark cloud cover pattern.
Traits that Increase a Piercing Pattern's Significance
Characteristics that increase a Piercing Pattern’s significance are given below (Nison, 1991):
- The greater the penetration of the second day’s bullish candlestick into the price levels of the first day’s bearish candlestick, the stronger the pattern and the more similar it becomes to a bullish engulfing pattern.
Reason: By viewing the second day’s bullish candle as a rejection of the first day’s bearish candle, the more the second day’s bullish candlestick penetrates into the price levels of the first day’s bearish candlestick the more powerful the bulls are showing themselves to be. 50% is a half rejection of the bears, 100% is a complete rejection of the bears, thus the higher the percentage of penetration the stronger the bulls rejection of the current downward trend.
- A major support area is penetrated when the second day opens below the support area but then prices rise and close above the support area.
Reason: A failed breakout below support is a sign to the bears that they have failed and the confirmation that the support is still intact gives confidence to the bulls to begin buying once again.
- High volume accompanies the second day bullish candlestick’s opening.
Reason: If there is large volume on the opening after a gap down from the prior day, there are many traders who are now short. When the prices begin moving upward, the many traders who are short are now in trouble and might begin to buy to cover which adds to the bullish pressure on prices to go higher.
Blended Candle Analysis Piercing Pattern = Hammer
Blended candle analysis combines multiple candlesticks into one candlestick. In this case, the piercing pattern (open of day 1 candle, close of day 2 candle) is combined and results in a hammer candlestick, which is generally interpreted as being bullish.
Piercing Pattern Candlestick Chart Example
An excellent example of a piercing pattern is shown above of the Silver ETF (SLV). Prior to the piercing pattern, the trend is down for a month and a half. The first day of the piercing pattern is a long bearish candlestick that closed creating yet another new low for the downtrend. The following day, which is the second day of the piercing pattern, opened below the low of the first day. This is yet another new low for the downtrend. However, after the opening low, the price reversed upward throughout the day penetrating about two-thirds of the way up into the first day bearish candlestick’s prices. Afterwards, a month long uptrend began.
Piercing Pattern Confirms Support
A few weeks earlier, the Energy SPDR ETF (XLE) established an area of support, illustrated on the chart above as a blue line. The bearish candlestick of the first day of the piercing pattern made a new low for the recent downtrend; but the bearish candlestick did not fall below the area of support. The next day, the second day of the piercing pattern, gapped lower and proceeded to fall toward the area of support. However, the bears failed to penetrate support. Thereafter, bulls were able to eliminate about two-thirds of the prior day’s bullish candlestick real body gains. An uptrend commenced thereafter.
- Nison, S. (2003) The Candlestick Course. Hoboken: John Wiley & Sons.
- Nison, S. (1994) Beyond Candlesticks: New Japanese Charting Techniques Revealed. New York: John Wiley & Sons.
- Nison, S. (1991) Japanese Candlestick Charting Techniques. New York: New York Institute of Finance.
- Rhoads, R. (2008) Candlestick Charting For Dummies. Hoboken: Wiley Publishing.
- ThinkorSwim. (2011). ThinkorSwim Resource Center: Candlestick Patterns Library.