On Neck Pattern

The on neck pattern occurs when a long bearish candle is followed by a short bullish candle that fails to close above the prior candle’s close. This candlestick formation represents a bearish continuation pattern.

The on neck pattern occurs during a downtrend or a pullback within an uptrend when a bearish candle with a long real body is followed by a small bullish candle that fails to rise above the black candle’s close. The small bullish candle could take any number of forms, such as a doji or Rickshaw Man, but it must not have a real body that rises above the prior candle’s close.

The chart pattern shows bulls attempting a rally that ends up fizzling out rather than succeeding in a long-term trend change. After the bullish thrust fails to break out above the prior day’s lows, bears regain control over the market and send prices lower in response.

The on neck pattern is considered to be more reliable than the related in neck pattern – where the second candle closes slightly higher than the first candle’s close – but some studies have shown that it still performs only slightly better than a coin flip.

Traders should use the on neck pattern in conjunction with other forms of technical analysis – such as chart patterns or technical indicators – to maximize their odds of success.

The security is engaged in a primary downtrend or a major pullback within a primary uptrend. The first candle posts a minor intraday high and reverses in a long black real body that prints a new low. This weak price action increases bearish complacency while forcing weakened bulls into full retreat.

The security gaps down by a few ticks on the second candle and sells off to a new low but dip buyers and other bulls take control prior to the closing bell, lifting price off the low in a steady uptick that pushes above the opening print. This strong price action increases bullish confidence while forcing complacent bears to review positions and worry about a reversal.

Limited bull power fizzles out prior to the close, with the closing tick failing to penetrate the first candle's real body.  Bears observe the decreasing bull power and press the downside in a continuation of the active downtrend. This weak price action drops the security to a new low on the third or fourth candle.