On Neck Candlestick Pattern: Meaning, Analysis, and Examples

Traders use candlestick patterns to predict price movements, and the On Neck pattern signals a potential continuation of a downtrend. Recognizing this formation helps traders make informed decisions about entering or exiting positions based on market momentum. Understanding its behavior within a trend provides insight into whether selling pressure remains strong or if a reversal might occur.

Key Visual Markers

The On Neck pattern consists of two candles: a long bearish candle, indicating strong selling pressure, followed by a smaller bullish candle that opens below the previous close and closes near or at the prior candle’s low. The second candle’s inability to push higher suggests weak buying momentum, reinforcing the likelihood of continued downward movement.

A defining characteristic is the second candle’s closing price. Unlike reversal formations, the On Neck pattern’s second candle does not close above the previous candle’s low. Instead, it touches or remains slightly below it, creating a horizontal alignment resembling a neckline. This visual alignment gives the pattern its name and signals that selling pressure remains dominant.

The shadows, or wicks, of the candles also provide insight into market sentiment. The first candle typically has little to no lower wick, showing that sellers controlled the session from start to finish. The second candle may have a small upper wick, indicating a brief attempt by buyers to push prices higher, but the failure to close above the previous low confirms that bearish sentiment is still in play.

Candle Body Placement

The positioning of the candle bodies plays a significant role in interpreting future price movement. The first bearish candle establishes downward momentum, setting the stage for the second candle’s reaction. When the second candle opens lower, it signals that sellers are still in control. Its closing position relative to the first candle’s low defines the pattern’s structure.

Since the second candle closes near or at the previous candle’s low, it suggests a temporary pause rather than a shift in trend direction. Buyers may attempt to stabilize prices but lack the strength to push beyond the established support level. This failure to generate a meaningful rebound often leads to renewed selling pressure.

The size of the second candle relative to the first also matters. A significantly smaller second candle reinforces weak buying interest, while a slightly larger body may indicate a stronger, albeit still insufficient, attempt to reverse momentum. If the second candle’s body is unusually long, the pattern may fail to confirm a continuation and could indicate a different structure altogether.

Volume Patterns

Trading volume helps confirm whether selling pressure is likely to persist. High volume accompanying the first bearish candle reinforces the idea that sellers are aggressive, pushing prices downward with strong conviction. This increased activity suggests widespread participation in the sell-off, making a continued decline more likely.

When the second, smaller bullish candle forms, its volume characteristics become just as important. If trading volume is noticeably lower than the previous session, it indicates weak buying interest. A low-volume rebound suggests most market participants are not convinced of a reversal, increasing the probability that sellers will regain control.

If the second candle forms with unexpectedly high volume, it could signal a shift in sentiment. A surge in buying activity may suggest some traders anticipate a potential reversal or short-term support level, which could lead to temporary consolidation before the downtrend resumes or even invalidate the pattern entirely. Observing volume behavior in subsequent sessions helps distinguish between a momentary pause and a true change in direction.

Downtrend Continuation Potential

The On Neck pattern often appears in markets where bearish sentiment dominates. One of the most telling signs of a likely continuation is how price behaves after the second candle forms. If subsequent sessions fail to generate a meaningful rally and instead break below the prior low, this confirms that sellers remain in control, reinforcing expectations of further downside movement.

Broader market conditions also influence whether the pattern leads to continued declines. If the On Neck forms within a larger bearish trend—especially one driven by negative economic data, weak earnings reports, or tightening monetary policies—the probability of downward continuation increases. For example, in an environment where interest rates are rising, equities often struggle to maintain upward momentum, making bearish patterns like the On Neck more reliable.

Confirmation is essential before acting on the pattern. Traders often look at additional indicators, such as moving averages or the Relative Strength Index (RSI), to gauge whether selling pressure is sustainable. If the RSI remains below 40 or a key moving average, such as the 50-day or 200-day, acts as resistance, it strengthens the case for further downside.

Example Chart Formation

Analyzing real-world chart formations helps traders recognize the On Neck pattern in different market conditions. Studying historical price action improves understanding of how the pattern develops and what signals confirm its effectiveness in predicting a continuation of the downtrend. Examining multiple instances across various asset classes, such as equities, commodities, and forex, provides a broader perspective on how this pattern behaves under different levels of volatility and liquidity.

One example of the On Neck pattern can be observed in a stock experiencing a prolonged sell-off due to weak earnings guidance. Suppose a company releases disappointing revenue projections, causing its stock price to decline sharply. A long bearish candle forms as investors react to the news, followed by a smaller bullish candle that closes near the previous session’s low. If the stock fails to recover in subsequent sessions and breaks below the pattern’s low, this confirms the continuation of the downtrend.

Another example can be found in the forex market, where currency pairs often exhibit strong trends driven by macroeconomic factors. Consider a scenario where a central bank announces a more hawkish monetary policy stance, leading to a sharp depreciation of a currency. The On Neck pattern may emerge as a brief consolidation before the currency resumes its decline. Traders monitoring this setup could use additional technical indicators, such as moving averages or Fibonacci retracement levels, to identify potential entry points for short positions.