The harami inner close as a reversal barometer

The two-candle wrap

A harami is a two-candle wrap in which the second real body opens and closes inside the open-to-close span of the first candle. A bullish harami is specified as a typically large dark candle after a decline, then a smaller candle that opens above the prior session's close and closes below the prior session's open.

A longer first candle, and a higher second close relative to the prior dark candle, are described as stronger visual evidence of a bullish reversal.

Follow-through zones

Depth of the second close inside the first candle is used as a three-zone gauge of new-swing force. Near the low of a prior dark candle implies a flat or slow advance, mid-range a moderate advance, and near the high a more forceful advance.

The same inner-close mapping is inverted for a bearish harami: a second close near the top of the prior light candle implies a slow decline, while a close near the low implies heavier selling pressure.

Location and momentum filters

A stochastic oscillator, and alternatively a moving-average convergence-divergence reading, is cited as an external check that a decline may already be ending before a bullish harami is treated as a reversal.

A harami is described as more noteworthy when it coincides with a trendline or with a 50-day or 200-day moving average, especially when that location is also an oversold condition. In this workflow the moving average is a trailing mean used as a location filter, not as a standalone trigger. The stochastic oscillator is a bounded momentum reading that marks oversold context for bullish wraps and overbought context for bearish wraps.

Two illustrated cases

In an illustrated Nasdaq case, a harami whose second bar was a doji formed near the 200-day moving average, and a gap higher the next session was presented as added evidence that the decline might reverse. A doji, a candle with little or no real body, is used here as a higher-weight second bar inside a harami at support.

In a May 2004 crude-oil daily case, repeated harami forms near the 42 level, each time price pressed above 40, were presented as sellers appearing, in contrast to contemporaneous projections that prices could reach 60 a barrel.

The bearish wrap

A bearish harami is defined as the inverse wrap after an advance: a typically large light candle, followed by a smaller dark candle that opens below the prior close and closes above the prior open. It is sought when the stochastic oscillator is in an overbought zone and is read as buying having stalled. A weaker open on the following session is given as confirmation.