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The Bearish Squeeze Alert — White Sessions With Bearish Meaning

One of the more unusual three-session candlestick indicators is the bearish squeeze alert. It is one of those patterns consisting of white sessions, but foreshadowing a downturn.

In the pure form of the indicator, you find three white sessions. Each one opens lower than the previous session, and closes higher. This means the real body of day two is "squeezed" by the longer real body of day one, and the same applies to day three relative to day two - progressively smaller real body sessions.

The same rules apply when the sessions are not all white, although the mix can get confusing. This is especially true since the bullish squeeze alert is ideal when it has three black sessions. In that case, the sessions open higher and close lower, and provide a bullish signal. Even so, the bearish squeeze alert can consist of a mix. The general rule is that the first session has to be a white candlestick; and sessions two and three can be either color.

The color of the sessions is not as critical as the squeeze pattern itself. As long as the squeeze shows up at the top of an uptrend, it probably meets the test. You need an uptrend to reverse or you cannot call this a bearish reversal signal. It's even stronger when the first session of the pattern reaches a new high within the existing uptrend. The strongest possible reversal is found when this also takes place right at the point of resistance. As soon as prices begin to diminish (not only retreating from the high, but also closing within the previous session's real body), it becomes clear that momentum cannot sustain for a breakout above resistance. Prices are probably going to retreat from that point forward.

This pattern - a white session followed by inside sessions - is easily spotted, although the purest form of all white sessions is harder to spot. Some analysts argue that the second and third sessions showing up as black candlesticks is a positive sign for the downtrend. This is so because ti demonstrates that the bears are in control. However, this does not always apply and the strongest bear squeeze alert is strong regardless of the color of sessions two and three.

Another aspect of the bear squeeze alert worth noting is that the three sessions form hidden gaps between one-two and two-three. This gap is strongest when all three sessions are white, making this form the best bearish indicator. A study of each session's closing level and the next session's open makes this point. Each one closes at the top of the candle and then the next session opens at the bottom. This may be interpreted as the gradual loss of upward momentum. Each session gaps down and then opens higher. Finally, the momentum is lost entirely and the bears take over.

The significance of the bear squeeze alert is easily lost because the gaps are invisible; and the successive white sessions are easily misread as bullish signals. However, the change in momentum is clear in two ways: first is the progressive inside session trend, and second is the price gaps between the three sessions.

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