Outside Bar : Bearish Pattern

An Outside Bar is a Short-term Bearish Pattern which indicates a possible reversal of the current uptrend to a new downtrend. This pattern is an indication of a financial instrument's SHORT-TERM outlook. Two-bar patterns reflect changes in investor psychology that have a very short-term influence on future prices - typically less than 10 bars. Often the immediate effect is trend exhaustion, then reversal. For traders looking for clear entry and exit points, these patterns serve well. They are normally not suitable as signals for long-term investors unless viewed as monthly bars.

Outside Bars exhibit a trading range that fully encompasses that of the previous bar. They can appear after both downtrends and uptrends, and are a strong signal of trend exhaustion leading to reversal.

Trading Considerations

Outside Bars can be either Bullish or Bearish depending on the direction of the inbound trend. If the inbound price trend is down, then upon identification of an Outside Bar, taking a long position or closing a short position is recommended. Conversely, if the inbound price trend is up, then upon identification of an Outside Bar, taking a short position or closing a long position is recommended.

The degree that the price bars and volume characteristics match the description above will likely have a bearing on the strength of the post pattern price movement. Look for price influence over the next 5 to 10 bars. Good trading practice dictates that these signals should not be used in isolation: fundamental data, sector and market indications and other technicals such as support/resistance and momentum studies should be used to support your trading decisions.

Criteria that Support

The wider the second bar relative to the narrower trading range of the preceding bar, the stronger the signal.
The sharper the rally preceding the Outside Bar, the more significant the bar.
The more bars encompassed, the better the signal.
The greater the volume accompanying the Outside Bar relative to previous bars, the stronger the signal.
The nearer the price closes to the extreme point of the bar that is away from the direction of the previous trend, the better. For example, if the previous trend is up and the price closes very near to the low of the Outside Bar, this is more favorable than if it closes near the high and vice versa.

Underlying Behavior

Outside Bars are classic indicators of trend exhaustion and likely reversal of sentiment. The presence of a pair of high volume bars following a sharp rally - with the second bar exhibiting a wide trading range that encompasses all or more of the first bar - is a powerful warning of a change of investor/trader psychology.