If you have been following this series sequentially, you know that I have already covered the Kicker Signal (candlestick pattern), which is one of the strongest candlestick patterns.
In a Kicker Signal, the price is either in an uptrend or a downtrend. However, a candle appears that is in contradiction with the ongoing trend. For example, an extended bearish candle may form suddenly in a bullish trend and vice versa. This contradicting candle closes at the previous candle’s open. Although not apparent on the chart, a gap has already formed since this candle has opened a gap away from where the price closed yesterday.
It is to be noted that gap formations signal a strong price action. The Kicker Signal shows that while the price seemed to go with the existing trend while opening, the investors tried to push it in the opposite direction. This is symbolized by the contradicting candle closing at the previous candle’s open. Thus, the Kicker signal is a strong reversal signal.
However, I wrote in the article on Kicker Signal that if the third day’s candle gaps back the other way (the previous trend before the contradicting candle formed), get out of that stock. This confirms the formation of another candlestick pattern called the Separating Line. A Separating Line candlestick pattern is a continuation signal. There is no reversal.
Let me first list the conditions of a Separating Line candlestick pattern. I will explain the rationale behind this pattern after that.
1) Like in all the patterns we are going to discuss, the long-term trend (1-year trend) should be in an uptrend. There is very little chance to succeed if the long-term trend is against your favor. Remember, it is difficult to swim against the tide. Our job as technical chart readers is to wait for the right time when the tide itself is going where we want to go.
2) The intermediate-term trend (3 months trend) should also be preferably bullish.
3) There should be a minor correction or a pullback. Remember, as a trend follower, a minor pullback after a bullish upswing is the best time to enter.
4) The price is either in an uptrend or a downtrend. However, a candle appears that is in contradiction with the ongoing trend. For example, an extended bearish candle may form suddenly in a bullish trend and vice versa.
5) This contradicting candle closes at the previous candle’s open. By this point, investors may think that this is a Kicker Signal candlestick pattern, which is a strong reversal pattern. However, you are advised to wait for an extra candlestick confirmation.
6) The third candlestick reveals the true face of the ongoing pattern. The third candle opens at the second candle’s open. It then rises or falls towards the trend that the second candle tried to reverse.
The rationale behind this pattern:
The second candle going completely opposite to the trend reflected a sudden change in investor sentiment. This may be because of unexpected news or earnings reports. However, the third candle nullified the sudden reaction by going in line with the ongoing trend. Thus, although the investors tried to push or pull the price in opposite direction, there was enough momentum in the trend that resisted the reversal move.
The trend will not reverse unless another promising reversal signal appears. Since the Separating Line candlestick pattern is an intriguing pattern brought about by equally intriguing circumstances, you are advised to keep looking at further price movement with more interest.
