Dark Cloud Cover
Also written Dark cloud cover pattern · Dark cloud
A bearish two-candle reversal near the top of a congestion area: a bullish candle, then a gap-up candle that turns bearish and closes below the midpoint of the first.
In plain language
A stock has been trading in a range for some weeks and is sitting near the top of it. One day it closes up. The next day it opens higher still, with a gap.
At that point buyers look to be winning. Then the session turns. By the close, the candle is down — and it has given back more than half of the previous day's gain.
That two-day shape is dark cloud cover. It is read as a warning that the range is not going to break upward after all.
How it works
Chapter 15.5.5 sets 3 conditions, and all 3 have to hold.
- Location. It is a 2-candlestick pattern which occurs near the top of the congestion area. The workbook's own footnote defines a congestion area as a price range where the market trades repeatedly over a period of time, "typically lasting for several weeks."
- The gap. In an existing uptrend, a bullish candle is followed by a gap up on the following day, and that gap up turns into a bearish candle.
- The close. The bearish candle closes below the midpoint of the previous bullish candle — in other words, it takes back more than 50% of the prior candle.
The midpoint test is the whole pattern. A red day after a green day is ordinary; a red day that erases more than half of the green day, having opened above it, is not.
Dark cloud cover is the exact mirror of the piercing pattern in 15.5.6: same 2-candle shape, opposite colours, bottom of the range instead of the top, bullish instead of bearish. The workbook gives them a shared footnote for that reason.
A worked example
Illustrative, following the workbook's definition. A stock has traded between Rs 580 and Rs 645 for 9 weeks — a congestion area. It is now near the upper end.
Day 1 is a bullish candle: open Rs 612, close Rs 640. Body Rs 28, so the midpoint is Rs 626.
Day 2 gaps up to open at Rs 648 — above day 1's close, as the pattern requires. Sellers then take over and it closes at Rs 621.
| Test | Result |
|---|---|
| Near the top of the congestion area | Yes, range top is Rs 645 |
| Gap up on day 2 | Yes, Rs 648 open against Rs 640 close |
| Day 2 bearish | Yes, closed Rs 27 below its open |
| Close below day 1 midpoint of Rs 626 | Yes, at Rs 621 |
All 4 hold, so this is dark cloud cover.
Change the day 2 close to Rs 632 and it is not. Rs 632 is above the Rs 626 midpoint, so less than half of day 1 has been taken back. The candle is still red and the day still looks weak, but the pattern fails on the one test that defines it.
Why NISM asks about it
Chapter 15.5.5 (Dark Cloud Cover) sits immediately before 15.5.6 (Piercing Pattern) and shares footnote 33 on the congestion area with it. The chapter's Sample Question 3 asks which features the piercing pattern is most likely to have, with the wrong options built from "two-candlestick versus three-candlestick" and "top versus bottom of the congestion area" — the same 2 axes that separate dark cloud cover from its mirror.
So the examinable content is the pair, not either pattern alone: 2 candles, top of the range, bearish, close below the midpoint.
Common exam traps
- The close must be below the midpoint of the previous candle, not merely below its close. A red candle that gives back 30% of the prior day is not dark cloud cover.
- The gap up is part of the pattern. Without it, the second candle simply opens inside the first and the setup is a different one.
- It belongs near the top of a congestion area. The piercing pattern is the bottom-of-range mirror, and swapping the two is the error the sample question is built to catch.
- The midpoint is measured on the real body, from the previous candle's open to its close.
- 2 candles, not 3. The morning star in 15.5.7 is the 3-candle pattern in this section.
Check yourself
1.The piercing pattern is most likely to have which of the following features?
- a)A two-candlestick pattern that occurs near the bottom of the congestion area
- b)A three-candlestick pattern that occurs near the top of the congestion area
- c)A two-candlestick pattern that occurs near the top of the congestion area
- d)A three-candlestick pattern that occurs near the bottom of the congestion area
Show the answer
Answer: (a) A two-candlestick pattern that occurs near the bottom of the congestion area
Two facts must both be right: the piercing pattern uses two candlesticks, and it forms near the bottom of a congestion area, which fits its bullish meaning.
Option C swaps the location — that describes dark cloud cover, the bearish two-candle mirror image found near the top of a congestion area. Options B and D swap the count: the three-candle patterns in this chapter are the morning star (bullish) and the evening star (bearish).
The numeric test for a piercing pattern is that the green candlestick’s body must cover at least half of the previous day’s red candlestick, after a significant gap between the red close and the green open.
2.According to the workbook, a bullish engulfing pattern is likely to signal a reversal when it is preceded by:
- a)At least two green candlesticks
- b)A gap up that turns into a red candle closing below the midpoint of the prior green candle
- c)A small-bodied candle that closes above a large green candle
- d)Four or more red candlesticks
Show the answer
Answer: (d) Four or more red candlesticks
The bullish engulfing pattern forms "when a small red candlestick is followed the next day by a large green candlestick", whose body "completely engulfs the body of the previous day’s red candlestick". Then the context rule: "They are likely to signal reversals when preceded by four or more red candle sticks. Traders look not only to the two candlesticks which form the bullish engulfing pattern but also at the preceding candlesticks."
Option A gets the direction wrong — a bullish reversal needs a decline to reverse, not a run of green candles. Option B describes dark cloud cover, a bearish pattern in which a gap up "turns into a bearish candle" that "closes below the midpoint of the previous bullish candle". Option C borrows from the evening star, whose middle bar is a small-bodied candle that "closes above the first green bar" — a bearish setup, not a precursor to a bullish engulfing.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Congestion areaA price range where a stock trades repeatedly for an extended period, typically several weeks, before eventually breaking out upward or downward.
- Engulfing patternA two-candle reversal pattern in which the second candle's real body completely swallows the first candle's body — green over red is bullish, red over green is bearish.
- Hanging ManA bearish reversal candle that appears after an up move — a small real body with a long lower shadow at least twice that body — and it is only a warning until the next candle closes lower.
- Piercing PatternA bullish two-candlestick reversal pattern near the bottom of a trading range — a red candle followed by a green candle whose body covers at least half the red candle's body.
- Support and resistancePrice levels where a move tends to pause or reverse — support where demand concentrates and forms a floor, resistance where supply concentrates and forms a ceiling.
- HammerA bullish reversal candle that appears after a price decline — a small real body with a lower tail at least twice that body — valid only once the next candle confirms by moving the price up.