06 February 2020

FASTQ - What Is The Abandoned Baby Chart Pattern?

"Our character is basically a composite of our habits. Because they are consistent, often unconcious patterns, they constantly, daily, express our character."
-- Stephen Covey  
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Abandoned Baby chart patterns come in 2 varieties... Bullish and Bearish.  As you might suspect, the 2 patterns are inverses of each other.  The definitions are the exact same, but in reverse.

Bearish Abandoned Baby -- A bearish abandoned baby is a specialized candlestick pattern consisting of three candles, one with rising prices, a second (normally a doji) with holding prices, and a third with falling prices. Technical analysts expect that this pattern signals at least a short-term reversal in a currently upward trending price. 

Bullish Abandoned Baby -- A bullish abandoned baby is a specialized candlestick pattern consisting of three candles, one with falling prices, a second (normally a doji) with holding prices, and a third with rising prices. Technical analysts expect that this pattern signals at least a short-term reversal in a currently downward trending price.  
Technical definition and sample images courtesy of Investopedia

The occurrence of this pattern is quite rare and thus tends to deliver good performance in the relevant direction over the short term.  

To identify the pattern, look for a strong candle in the prevailing direction, followed by a gap in the same direction, followed by an immediate gap in the opposite direction... thus leaving the middle candle alone and isolated or abandoned. 

While the cleanest patterns tend to work best, I also like to take the idea of the pattern into account in closely related situations.  For example, $TSLA delivered what looks like a Bearish Abandoned Baby pattern on 5 February 2020 with the exception of the second gap.
The front side gap (between February 3rd and 4th) is readily apparent on this daily chart, but there is overlap between the February 4th and 5th prices.

It'll be interesting to watch how this bears out in the coming days.  Feel free to take a look back and give it a "grade" at whatever point you happen to come across this post.