These three methods include the bullish rising three methods and the bearish falling three methods. (Note how the number three again makes an appearance.) These are both continuation patterns. The benchmarks for the rising three methods pattern (see Exhibit 7.25) include:
A long white candlestick.
This white candlestick is followed by a group of falling small real body candlesticks. The ideal number of small candlesticks is three but two or more than three are also acceptable as long as they basically hold within the long white candlestick’s range. Think of the small candlesticks as forming a pattern similar to a three-day harami pattern since they hold within the first session’s range. (For this pattern that would include holding within the shadows; for a true harami it would only include the real body.) The small candlesticks can be any color, but black is most common.
The final day should be a strong white real body session with a close above the first day’s close. The final candlestick line should also open above the close of the previous session.
This pattern resembles the Western bull flag or pennant formation. Yet, the concept behind the rising three methods is from the 1700s. The three methods pattern is considered a rest from trading and a rest from battle. In more modern terms, the market is, with the group of small candles, “taking a breather.”
The falling three methods pattern (see Exhibit 7.26) is the bearish counterpart of the rising three methods pattern. For this pattern to occur, the market should be in a downtrend and a long black candlestick should emerge. It is followed by about three small rising candles (usually white) whose real bodies hold within the first candlestick’s range (including shadows). The final session should open under the prior close and then close under the first black candlestick’s close. After this last black candlestick session, the market should head lower. This pattern resembles a bear flag or pennant formation.
Exhibit 7.27 shows a classic rising three methods pattern. The market is in an uptrend with three downtrending black small real bodies preceded by a white candlestick. The black candlesticks essentially held within the white candlestick’s range. The last white candlestick then closes above the first candlestick’s close. A factor that may lend more significance to this pattern is if volume on the white (black) sessions for the rising (falling) three method pattern is higher than the small candlestick sessions. Here we see the white session days of the rising three methods pattern had greater volume than on the three small black candlestick sessions.
Exhibit 7.28 is also a rising three methods pattern. When completed, the bonds pushed until they reached the bearish engulfing pattern.
Although the ideal three methods has three small candlesticks following a long white one, Exhibit 7.29 is an example of two small candlesticks. The price action in June 1988 built a tall white candlestick. Black candlesticks that held within this white candlestick’s range followed in July and August. September formed another white candlestick which made a new high for the move but failed to close above June’s close by only 3 ticks. Normally, we would want to see a higher close. In this case, since the last white candlestick (September) only missed closing above June’s close by 3 ticks, this pattern should still be considered a rising three methods pattern with bullish confirmation the next session. A new high close in October gave this confirmation and secured the bullish outlook.
Three small candlesticks held within the first candlestick’s high and low range are evident in Exhibit 7.30. These were trailed by another white candlestick. This last white candlestick had the same close as the first one, so we need confirmation. When the next hour opened above the last white candlestick, the bullish confirmation was at hand. Observe how the top of the rising three methods pattern became support area as tested by the first hour on August 1.
Two examples of this bullish continuation pattern appear in Exhibit 7.31. The first rising three methods pattern, in early July, shows how there can be two candlesticks instead of three, after the first tall white real body. Notice how the two black candlesticks held within the first candlestick’s range. Then the last white real body of this pattern opened above the close of the prior session and made a new high close for the move. The second illustration of this pattern in Exhibit 7.31 displays how the color of the real bodies after the first candlestick does not have to be black. As long as the real bodies hold within the first session’s range it has the potential to be a three methods pattern. Here the potential was fulfilled as the last long white candlestick closed at a new high.
In March 1989, a window appeared as shown in Exhibit 7.32. Based on the saying that corrections go to the window, one should expect a bounce up to the window. From there the preceding downtrend should resume. After the window, three small real bodies developed. The assault on the window took place on the first week of April. It failed from there. Two weeks later, on the third small white candlestick week, there was another attempt to close the window. This attempt also faltered. The last long black candlestick closed under the first black candlestick’s close. This action completed the five candlesticks of the falling three methods.
Exhibit 7.33 is an example with four, instead of three, small real bodies. The key is that the real bodies hold within the first day’s range. The last large black candlestick concluded this pattern. Note how tick volume'” confirmed the black candlesticks action. That is, tick volume expanded with the black candlesticks and shrank with the intervening white candlesticks.
The intra-day chart in Exhibit 7.34 addresses an important principle-do not act on a formation until that formation is completed. Here, for instance, is an example of an incomplete falling three methods. A lengthy black real body developed during the first hour on April 23. Three uptrending small real bodies then appeared. A long black candlestick follows these small candlesticks. The close on the fifth hour’s candlestick was not under the close of the first hour’s candlestick. Thus the falling three methods was not completed. If there is bearish confirmation during the next session, the action should still be viewed as confirmation of a bearish falling three methods since the closes of the first and last black candlesticks were so close. In this case, there was no bearish confirmation over the next hour or two.
A doji appeared after the last black real body. This doji, joined with the prior black real body, fashioned a harami cross. This is a reversal pattern which hinted that the immediately preceding downtrend would not persist. In addition, the lows over the next few hours successfully tested all the hourly lows from April 23. Thus, if one anticipated that the falling three methods would be completed, one would have guessed wrong. Wait until the pattern is formed, or confirmed, before acting on its implications!
Exhibit 7.35 is a classic falling three method whose bearish implication was negated by the hammer. If the hammer was not enough to tell one the downleg was ending more proof was added with the white session following the hammer. This completed a bullish engulfing pattern.