The harami pattern (see Exhibit 6.1) is a small real body which is contained within a prior relatively long real body. “Harami” is an old Japanese word for “pregnant.” The long candlestick is “the mother” candlestick and the small candlestick as the “baby” or “fetus.” We discussed how spinning tops (that is, small real bodies) are useful in certain formations. The harami is one of these formations.
The harami pattern is the reverse of the engulfing pattern. In the engulfing pattern, a lengthy real body engulfs the preceding small real body. For the harami, a small real body follows an unusually long real body. For the two candlesticks of the engulfing pattern the color of the real bodies should be opposite to one another. This is not necessary-for the harami. You will find, however, that in most instances, the real bodies in the harami are oppositely colored. Exhibit 6.7 displays the difference between the engulfing and harami patterns
The harami formation is comparable to the Western inside day. An inside day occurs when the highs and lows are within the prior period’s range (see Exhibit 6.2). Yet, while a Western inside day is usually thought of as having little, or no, forecasting importance, the harami pattern predicts that the market will separate from its previous trend. While a Western inside session requires the high and low be within the prior session’s range, the harami requires a narrow opening and closing range (that is, a small real body) to be within the prior wide opening and closing range (that is, a tall real body).
The harami pattern is usually not as much of a significant reversal signal as are, say, the hammer, hanging man, or engulfing patterns. With the harami a brake has been applied to the market; the immediate preceding trend should end and the market will often come to a lull. At times, the harami can warn of a significant trend change-especially at market tops.
Exhibit 6.3 illustrates a distinctive type of harami called a harami cross. A harami cross has a doji for the second day of the harami pattern instead of a small real body. The harami cross, because it contains a potent doji, is viewed as a major reversal signal. The harami cross is sometimes referred to as the petrifying pattern.
As illustrated in Exhibit 6.1, the color of the second session is unimportant. The decisive feature of this pattern is that the second session has a minute real body relative to the prior candlestick and that this small real body is inside the larger one. The size of the shadows are usually not important in either a harami or harami cross.
The harami displays a disparity about the market’s health. After a bull move, the long white real body’s vitality is followed by the small real body’s uncertainty. This shows the bulls’ upward drive has weakened. Thus a trend reversal is possible. During a bear move, the heavy selling pressure reflected by a long, black real body is followed by the second day’s vacillation. This could portend a trend reversal since the second day’s small real body is an alert that the bears’ power has diminished.
Exhibit 6.4 illustrates that a small rally started on April 18. Harami 1 called its end and the selloff that started with harami 1 stopped with harami 2. Harami 3 reflects how a harami pattern might be useful even if there is no evident trend before a harami pattern occurs. Note that there was no evident trend during the first few days of May. Then harami 3 arose with its long, white real body followed by a small, black real body (remember the color of the second day’s real body is not important).
A trader could, nonetheless, use this pattern as a signal that the rally started on the strong, white day had failed. The market was now at a point of indecision. A buy would not be recommended until the indecision had been resolved via a close above the highs of harami 3.
Harami 4 was a classic. An uptrend was evident prior to the tall white candlestick. The next day’s small real body completed the harami. This small real body also took on the negative aspects of a shooting star day (although not a perfect star since the real body was not above the prior real body).
Exhibit 6.5 illustrates exemplary harami. Each of the second day’s real bodies are diminutive compared to the prior long real bodies. The first harami implied a lack of upside momentum; the second harami implied a drying up of selling pressure.
Exhibit 6.6 illustrates how the two candlestick harami pattern in late March spelled the top of the market. The selloff continued until the bullish hammer occurred on April 24. Notice how the shadow of the second session in the harami was outside the real body of the prior session. This demonstrates the importance of the relationship between the real bodies and not the shadows.
Exhibit 6.7 shows a steep decline which ensued from the bearish engulfing pattern of May 7 and 8. This harami marked the change of a downtrend into a lateral band.
Intra-day traders could use the harami in Exhibit 6.8 as a signal that the prior intra-day trend might be over. Appropriate action would then be warranted. In this example, the early April 17 precipitous price decline ended and the market went into a lull after the harami pattern. This harami could have been used by day traders to cover shorts. Like any bottom reversal pattern, this harami did not preclude the possibility that the market would resume its downward course. Yet, this harami relayed a condition about the market. Specifically, it told us that, at least at the time of the harami, the downward pressure had subsided.
Exhibit 6.9 is a good example of a precipitous downtrend converted to a lateral trading environment after the advent of the harami. In this example we see how the prior downtrend, in which prices cascaded from $5.40 to $4.85, stopped at the harami. But the harami did not necessarily imply a rally. After a harami the market usually eases into a congestion band.
The regular harami has a tall real body followed by a smaller real body. Yet, there are no rules as to what is considered a “small” candlestick. This, like many other charting techniques, is subjective. As a general principle, the smaller the second real body, the more potent the pattern. This is usually true because the smaller the real body, the greater the ambivalence and the more likely a trend reversal. In the extreme, as the real body becomes increasingly smaller as the spread between the open and close narrows, a doji is formed.
As mentioned, a doji preceded by a long real body is called a harami cross. The harami cross carries more significance than a regular harami pattern. Where the harami is not a major reversal pattern, the harami cross is a major reversal pattern. A harami cross occurring after a very long white candlestick is a pattern a long trader ignores at his own peril. Harami crosses also call bottoms, but they are more effective at tops.
Exhibit 6.10 illustrates how the rally from mid-March abruptly ended when the harami cross pattern formed on April 2 and 3. Exhibit 6.11 shows how the large upside gap made in mid-January shouted, “bull market.” But, the harami cross said, “no bull market now.” Exhibit 6.12 shows how an unusually large black candlestick session followed by a doji created a harami cross. It shows how the market had severed itself from the prior downtrend. A hammer like session after the doji of the harami cross (that successfully tested the recent lows) gave further proof of a bottom.