Counterattack lines are formed when opposite colored candlesticks have the same close. The best way to describe this pattern is by discussing the illustrations in Exhibits 6.38 and 6.39. Exhibit 6.38 is an example of a bullish counterattack line. This pattern occurs during a decline. The first candlestick of this pattern is long and black. The next session opens sharply lower. At this point, the bears are feeling confident. The bulls then stage their counterattack as they push prices back up to unchanged from the prior close. The prior downtrend has then been bridled.
The bullish counterattack is comparable to the bullish piercing line. If you remember, the piercing line has the same two-candlestick configuration as that shown for the bullish counterattack pattern. The main difference is that the bullish counterattack line does not usually move into the prior session’s white real body. It just gets back to the prior session’s close. The piercing pattern’s second line pushes well into the black real body. Consequently, the piercing pattern is a more significant bottom reversal than is this bullish counterattack line. Nonetheless, as shown in some examples below, the bullish counterattack line should be respected.
The bullish counterattack line also looks similar to the bearish in-neck pattern. The difference is that the white bullish counterattack line is a longer candlestick than the white candlestick of the in-neck line. In other words, with the counterattack line, the market opens sharply lower and then springs back to the previous close, while the in-neck line opens slightly lower and then moves back to the prior close.
Exhibit 6.39 illustrates the bearish counterattack line. It is a top reversal pattern in that it should stall the prior rally. The first candlestick, a long white one, keeps the bullish momentum going. The next session’s opening gaps higher. Then the bears come out fighting and pull prices down to the prior day’s close. The bulls’ tide of optimism on the second day’s opening probably turned to apprehension by the close.
As the bullish counterattack line is related to the piercing line, so the bearish counterattack line is related to the dark-cloud cover. The bearish counter attack, like the dark-cloud cover, opens above the prior day’s high. Unlike the dark-cloud cover, though, the close does not go into the prior day’s white candlestick. Thus, the dark-cloud cover sends a stronger top reversal signal than does the bearish counterattack line.
An important consideration of these counterattack lines is if the second session should open robustly higher (in the case of the bearish counterattack) or sharply lower (for the bullish counterattack). The idea is that on the opening of the second day of this pattern, the market has moved strongly in the direction of the original trend. Then, surprise! By the close, it moves back to unchanged from the prior ‘session!
On May 29, in Exhibit 6.40, the long white candlestick reinforced the bullish outlook from a rally that started the prior week. Sure enough, on May 30, the market surged ahead on the opening. However, it was downhill from there for the rest of the session. By the close, the market had fallen back to unchanged from the prior close. These two sessions, May 29 and 30, constructed a bearish counterattack pattern.
Exhibit 6.41 shows that a rally terminated with the bearish counterattack line. Exhibit 6.42 shows that the price waterfall, which began with the bearish engulfing line in March 1989, ended with the bullish counterattack a few months later. Remember, all trend reversal indicators, like the counterattack line, tells you is that the trend will change. That does not mean prices will reverse direction. Here is an example of how a bullish reversal pattern signaled that the prior downtrend was over as the trend went from down to sideways. This example also shows that the closes do not have to be identical in order to make the pattern valid.
In Exhibit 6.43 one can see how prices eroded from the shooting star until the bullish counterattack line appeared. Another positive feature about this bullish counterattack line is that it was a session which opened under the late July, early August support area but, nonetheless, the new lows could not be maintained. This showed that the bears could not take control of the market.