An On Neck Pattern is taken as a bearish continuation pattern, a signal of continued downward market movement.
In the below graphic a Bearish market experiences an On Neck Patter and then continues to move to the downside. Candle stick 2 shows a time interval where bulls come back into the market but have very little success in turning momentum from bearish to bullish.
Candle stick 1 must be red and candle stick 2 green. The key point of the pattern being that Candle stick 2 has a close which is lower than the low point (closing price) of Candle stick 1.
The pattern is showing that bulls stepped into the market but were pretty convincingly out-gunned. One of the key characteristics is that the Closing prices of candle stick 1 and candle stick 2 are so close, almost ‘neck-and-neck’.
The On Neck Pattern is not the most reliable of signals that a further downward movement is about to take place. It’s easy to convince yourself that a closing price that is lower than the previous close is a bearish signal – for obvious reasons that is a very widely held view. But in this pattern there are signs that bulls are finding strength; or that the market is at least about to enter a period of sideways movement.
It is an interesting pattern, and not the most frequently occurring, but like all candle stick patters does work best when considered in conjunction with other indicators.
If the time interval represented by candle stick 2 also sees significantly higher trading volumes then this would suggest greater certainty can be gained from the signal. These extra trading volumes showing that despite a great number of bulls stepping into the market the bears prevailed.
If you’re new to trading using candle sticks it’s good to practice looking at the volume bar as much as it is the candlestick. A small candle such as a doji that sees exceptional trading volumes can be as significant, if not more so, than a long candle stick that shows price moves in lightly traded markets. Think of the stock markets in the days either side of a national holiday. The big bosses of investment houses will likely be taking an extra day off here and there whilst leaving understudies to act as a ‘safe pair of hands’. The levels to which prices move might not be where the bigger fish think it should be when they get back into the office and a correction then occurs.