A ‘Piercing Line’ is a a two-candlestick bullish reversal pattern consisting of a black candle with a big body and a white candlestick that opens below the low of the initial candle. After opening at the lows the second candlestick should push well inside the body of the first candle and close near the highs for the period. The name derives from how the second candle pushes into or pierces the body of the preceding candle. This is considered to be a high credibility pattern.
Technical Description
1) The first black candlestick should have a big body and be preceded by a bear market.
2) We see the next candlestick open below the low of the first candle and push back inside its body.
3) The second candle should close above the middle of the preceding black candlesticks’ body, preferably near its highs.
Mark’s Perspective
Piercing Line’s often occur at the bottom of a ranging market though they may also turn up in a bearish trending market. The fact that second candle opened below the low of the first suggests sentiment is very bearish but the failure to follow through and the subsequent close well into the body of the first candle suggests bulls have managed to wrest control of the market.
In case of a ranging market immediate buys may be taken as the pattern appears at the bottom with the range ceiling as the reversal target. When in a clear downtrend a confirming gap up may be taken as excuse for going long. Otherwise a white candlestick with a higher close than the second piercing candle can be used as a confirmation. No matter the situation stop losses should be placed above the second candlestick’s low. The deeper the penetration of the second candlestick the more significant the pattern becomes.