Since these three patterns look almost identical, it is confusing for a beginner why one pattern is a reversal signal but another two are continuation patterns. This has to do with the psychology of investors that each pattern reflects.
This is how to spot an In Neck Line candlestick pattern.
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) 4) While in this minor correction or pullback, a long bearish candle forms in the downtrend.
5) A bullish (green) candle gaps down from the previous extended red candle. It closes above the previous candle’s low shadow. In contrast, in an On Neck candlestick pattern, the candle closes at the previous candle’s low. Thus, the only difference between these two candlestick patterns is the position of the second candle’s closing with the first candle’s lower shadow. The difference may not be significant in some cases.
This is also how this pattern got its name. The green candle closes in the neck area of the previous candle.
6) The second candle is smaller than in the meeting line candlestick pattern. This further signifies that the upwards bullish push had lesser strength.
The rationale behind this pattern:
The formation of a green bullish candle is a bullish signal to some extend. Some bulls were able to defy the ongoing trend and raise the price by buying. However, the day’s closing only slightly above the previous candle’s low means that while the bulls gave their best, they could not push the price beyond that. Thus, this premature aggression of bulls is not enough for a trend reversal.
Thus, the downtrend may continue for some time before another promising bullish reversal pattern appears. This is why the In Neck Line is called a bearish continuation pattern.