This is Part 17 of the NISM Technical Analysis short notes series on PassNISM.in. In this post, we cover candlestick reversal patterns, chart consolidation patterns, support and resistance, and trendlines and channels — all critical topics for the NISM Series VIII Equity Derivatives exam and the NISM Research Analyst certification.
Candlestick Reversal Patterns
Candlestick patterns help traders identify potential trend reversals or continuations by reading the psychology embedded in price action. These are high-priority topics for any NISM certification exam.
1. Hanging Man (Bearish Reversal)
- Appears after an upward move — signals a potential trend reversal to the downside
- Has a small real body and a long lower shadow — at least twice the size of the real body
- Little or no upper shadow
- The long lower shadow shows sellers gained control during the session
- Confirmation required: The next candle must close lower to validate the pattern — do not trade before confirmation
2. Hammer (Bullish Reversal)
- Appears after a price decline — signals a potential trend reversal to the upside
- Similar to a Hanging Man in shape — small real body, long lower shadow (at least twice the body), little or no upper shadow
- Captures the seller's inability to drive prices lower — buyers absorb selling and push the price back up by session close
- Confirmation required: The next candle must close higher to confirm the reversal
Key Exam Distinction: Both Hammer and Hanging Man look identical in shape. The difference is their position: Hammer appears after a downtrend (bullish); Hanging Man appears after an uptrend (bearish).
3. Bullish Engulfing Pattern
- Formed when a small red candle is followed the next day by a large green candle
- The green candle's body completely engulfs the previous day's red candle body
- Stronger signal when preceded by four or more consecutive red candles
- Traders also examine the preceding candles to assess the strength of the potential reversal
4. Bearish Engulfing Pattern
- A large red candle completely engulfs the previous day's green candle body
- More significant when it occurs after a sustained price advance
- Both candles should be relatively long compared to surrounding price bars for the pattern to have significance
- The real body (difference between open and close) is what matters — not the wicks
- Has less significance in choppy or sideways markets
5. Dark Cloud Cover (Bearish)
- A two-candlestick bearish reversal pattern that typically appears near the top of a congestion area or after an uptrend
- First candle is a bullish (green) candle in an existing uptrend
- Second candle opens with a gap up, then reverses and closes below the midpoint of the first candle's body
- Signals that selling pressure is gaining the upper hand
6. Piercing Pattern (Bullish)
- A two-candlestick bullish reversal pattern that appears near the bottom of a congestion area
- First candle is red (bearish); second candle is green (bullish)
- The green candle opens below the red candle's close and rises to cover at least half of the previous red candle's body
- The mirror opposite of the Dark Cloud Cover pattern
7. Morning Star Pattern (Bullish)
- A three-candlestick bullish reversal pattern
- Composed of: (1) a tall red candle, (2) a small-bodied candle (red or green) with long wicks, and (3) a tall green candle
- The middle candle captures market indecision as bears begin to lose control
- The third candle confirms the reversal and marks the start of a potential new uptrend
8. Evening Star Pattern (Bearish)
- The bearish counterpart to the Morning Star — a three-candlestick bearish reversal pattern
- Composed of: (1) a large green candle in an uptrend, (2) a small-bodied candle (red or green) that closes above the first candle, and (3) a large red candle that opens below the middle candle and closes near the centre of the first candle's body
- Signals that the uptrend is losing momentum and a reversal may follow
Chart Consolidation (Continuation) Patterns
These patterns occur during a pause in the prevailing trend. They typically resolve in the direction of the prior trend, making them "continuation" patterns.
1. Symmetrical Triangle
- Represents a consolidation period before the price breaks out or breaks down
- Formed by a series of lower highs and higher lows converging toward a point
- Also called a wedge chart pattern
- Breakout above the upper trendline = new bullish trend; breakdown below the lower trendline = new bearish trend
2. Ascending Triangle (Bullish Continuation)
- Forms when the market makes a series of higher lows while repeatedly testing the same resistance level
- Typically seen in uptrends and considered a bullish continuation pattern
- Signals strengthening buying pressure and a potential breakout above resistance
- Long trade triggered when price breaks above the top of the pattern; short trade if price breaks below the lower trendline
- Profit target = height of the triangle added to the breakout point
3. Descending Triangle (Bearish Continuation)
- Formed when the market makes lower highs but holds the same level of lows
- Typically seen in downtrends and viewed as a bearish continuation pattern
- Bears gain increasing control, pressing toward the flat lower support line
- Breakdown below support confirms the pattern and signals a new bearish leg
4. Flags and Pennants (Continuation Patterns)
- Both are short-term continuation patterns that follow a sharp, rapid price move (the "flagpole")
- Flag: Sideways or slightly lower consolidation that takes a rectangular shape
- Pennant: Consolidation that forms a small symmetrical triangle shape
- The sharp move preceding the flag or pennant is called the flagpole
- After consolidation, the price typically resumes in the direction of the flagpole move
- Entry signal: price breaking above the upper flag/pennant trendline
Support and Resistance — The Foundation of Price Action Trading
Featured Snippet Answer: Support is a price level where a downtrend is expected to pause due to a concentration of demand — it acts like a "floor." Resistance is a price level where an uptrend is expected to pause due to concentrated supply — it acts like a "ceiling."
Why Do Support and Resistance Matter?
- They act as psychological anchors — traders remember price levels where past reversals occurred
- Buy and sell orders cluster near these levels, creating self-reinforcing price reactions
- They define stop-loss and take-profit zones for risk management
- Breakouts or bounces from these levels confirm the direction of the trend
Types of Support and Resistance
| Type | Description | Example |
|---|---|---|
| Horizontal | Flat levels where price repeatedly reverses | Stock resisting at Rs. 1,950 |
| Trendline | Diagonal lines connecting higher lows (support) or lower highs (resistance) | Upward sloping support in a bull trend |
| Moving Averages | Dynamic support/resistance based on price averages | Price bouncing off the 50-day MA |
| Fibonacci Levels | Retracement levels at 23.6%, 38.2%, 50%, 61.8% | Stock retracing 38.2% from swing high |
| Pivot Points | Calculated from the previous period's high, low, close | Commonly used in intraday trading |
| Psychological Levels | Round number price points act as natural barriers | Nifty 25,000 as a psychological support/resistance |
Role Reversal — Support Becomes Resistance and Vice Versa
Once a support level is broken decisively, it typically becomes a new resistance level — and vice versa. This happens because traders who bought at the old support level now have losses and will sell to break even if the price returns to that level, creating selling pressure.
Breakouts vs False Breakouts
- Breakout: Price moves decisively beyond a support or resistance level, ideally with volume confirmation
- False breakout: Price temporarily breaches a level but quickly reverses, trapping traders on the wrong side
- Volume confirmation and candlestick patterns (e.g., bullish engulfing, hammer) help validate genuine breakouts
Quantifying the Strength of Support and Resistance Levels
- Number of touches: More touches indicate a stronger and more significant level
- Volume at the level: Higher volume indicates greater market conviction at that price
- Time spent near the level: Longer consolidation makes the level more significant
- Recency: More recent levels carry more weight than older ones
Trendlines and Price Channels What Is a Trendline?
A trendline is a straight line that connects two or more price points and extends into the future to act as a line of support or resistance. Three or more points increase the reliability of the trendline significantly.
- Upward sloping trendline (connecting higher lows) = bullish momentum — acts as support
- Downward sloping trendline (connecting lower highs) = bearish momentum — acts as resistance
- Horizontal trendline (connecting equal highs or lows) = range-bound or sideways market
What Is a Price Channel?
A channel is formed by drawing two parallel trendlines — one connecting highs and the other connecting lows. The price movement is contained within this defined range.
- Ascending channel: Higher highs and higher lows — bullish
- Descending channel: Lower highs and lower lows — bearish
- Horizontal channel: Equal highs and lows — rangebound market
Trendline and Channel Trading Strategies
- Bounce trades: Buy near trendline support or sell near resistance, with candlestick confirmation
- Breakout trades: Enter on a decisive break beyond the trendline or channel boundary with volume confirmation
- Range trading in channels: Buy near the lower boundary, sell near the upper boundary
- Trailing stops: Use the trendline to trail stop-losses in trending markets
Common Pitfalls with Trendlines
- Drawing trendlines that fit a personal bias rather than actual price action
- Failing to adjust trendlines after a clear invalidation or breakout
- Over-relying on trendlines without confirmation from other technical tools
Quick Revision: Key Takeaways for NISM Exam
- Hammer and Hanging Man look identical — context (after uptrend vs downtrend) determines the signal.
- Engulfing patterns: Bullish = small red candle followed by large green that fully covers it. Bearish = reverse.
- Dark Cloud Cover is bearish (top of uptrend). Piercing Pattern is bullish (bottom of downtrend).
- Morning Star = bullish three-candle reversal. Evening Star = bearish three-candle reversal.
- Ascending triangle = bullish continuation. Descending triangle = bearish continuation.
- Support = demand floor. Resistance = supply ceiling. Broken support becomes resistance and vice versa.
- A valid trendline requires a minimum of two points; three or more increases reliability.
Internal Links for Further Reading
- Part 16: Technical Analysis, Chart Types & Dow Theory
- Part 18: Technical Indicators – Moving Averages, MACD, RSI & OBV
- NISM Series 15 Research Analyst – Complete Study Guide
- NISM 15 Free Mock Test – Practice Now
Sample Exam Questions (Practice)
Q1: The Piercing Pattern most likely occurs:
a) Near the top of a congestion area after an uptrend
b) Near the bottom of a congestion area as a bullish reversal
c) In the middle of a strong uptrend
d) As a continuation pattern in a downtrend
Answer: b) Near the bottom of a congestion area as a bullish reversal
Q2: A Hanging Man candlestick pattern is:
a) A bullish reversal occurring after a downtrend
b) A bearish reversal occurring after an uptrend
c) A continuation pattern in an uptrend
d) A neutral pattern indicating indecision
Answer: b) A bearish reversal occurring after an uptrend
Next in this series: Technical Indicators – Moving Averages, MACD, RSI, ADX & OBV – NISM Notes