Unlike all the candlestick patterns that we discussed in previous articles, which were reversal patterns, the On Neck Line candlestick pattern is a bearish continuation pattern.
I included this pattern especially to show you the distinction between the Meeting Line pattern and the On Neck Line pattern. While they both look similar, the first is a reversal pattern while the second is a continuation pattern.
This is how to spot a On Neck Line 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) 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 at the previous candle’s low shadow. Remember, I said that the green candle closes at the previous candle’s low, and not at the previous candle’s closing.
This is also how this pattern got its name. The green candle closes on the neck of the previous candle.
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 at 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 On Neck Line is called a bearish continuation pattern.