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Candlestick Charting - meeting and piercing lines

Posted November 3, 2011

Topics: Finance & Investing

Many candlestick formations have graphic and descriptive names. This helps to keep the dozens of candlestick indicators clear in your mind. Among these are several two-session patterns including the meeting lines and piercing lines patterns. These serve as great confirmation signals at the end of a trend, signaling potential reversal. For day traders and swing traders, these kinds of subtle for informative signals are quite valuable.

The meeting lines pattern is an indicator in which the top of one session’s real body is at approximately the same price level as the bottom of the session next to it (or vice versa). In a bull meeting lines formation, the setup day is black and the signal day is white. In a bear meeting lines formation, the setup day is white and the following signal day is black.

The signal is a strong one because the two sessions have an invisible gap. Although the lines meet, a gap takes place between the first day’s closing price and the second day’s opening price. Some chartists miss this because it is not immediately apparent. In the bull meeting lines indicator, the opening in the signal day is much lower than the previous day’s close. In a bear meeting lines indicator, the opening of the signal day is much higher than the previous day’s close, but price immediately retreats. It’s the invisible gap that gives the formation its strength.

The piercing lines formation is very similar. In fact, the same pattern combinations apply to piercing lines as to meeting lines. The difference is that the trading ranges of each day overlap. However, the invisible gap between open and close in each session is what gives piercing lines the same level of importance as a reversal signal. An alternate name for the bear piercing lines formation is the dark cloud cover. It is so named because the signal day is higher than the set-up, but its price retreat dominates the two-session trend direction.

Whenever you spot two consecutive long candles with opposite colors, it is a significant development. The long candle reveals a broad range of prices between opening and closing prices, and the direction reversal with two long candlesticks is not expected. So the likelihood that the resulting invisible gap is a reversal signal is very high.

The meeting lines and piercing lines formations are easily overlooked, but remember that they combine trading volatility with a less than obvious invisible gap. Uncovering this clue makes chart analysis and entry or exit timing much more accurate. Even so, false indicators occur often, so you need independent confirmation; look for subsequent narrow range days (doji formation), volume spikes, or recurring gapping action.

Michael C. Thomsett is an instructor with the New York Institute of Finance. He teaches five  courses: “Swing Trading with Options,” “The Amazing World of Options,” “Synthetic Options Strategies”, “Options timing and dividend income strategies,” and “Using candlestick reversal and continuation patterns to improve timing.”  He is also an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com.