The Bullish Harami signal is found at the bottom of a downtrend.
In order for the Bullish Harami signal to be valid, the following conditions must exist:
The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
The second day of the signal should be a white candle opening above the Close of the previous day and closing below the Open of the previous day’s black candle.
The following Figure shows a Bullish Harami formation. During a downtrend, there comes a time when the investors who have held long hoping for a reversal, finally give in. There is panic selling in the street. At the end of the day one can witness along black candle. However, smart money is waiting for this opportunity. The next day, the stock gaps up and bulls start piling in. The shorts are nervous now. The bulls manage to close the candle higher into the previous day's body. If the next day, the bulls confirm their stay, the bears will move away and the downtrend will have a high probability of reversal.
Notice the Bullish Harami formation in Texas Instruments. The stock was clobbered from around the $34 area to near $27. What do you see towards the bottom of the downtrend? Panic selling. This chart shows the classic pattern which novice investors / traders exhibit. Smart money, which most probably sold after the gap down following the Shooting Star, is buying with both fists after the Harami. Learn to read the signals of the market and it will reward you.
Chart courtesy stockcharts.com
Notice the Bullish Harami formation in Tata Motors shown below. The stock tumbled down from about Rs. 600 until the Bullish Harami stopped the selling. Stochastics were in oversold conditions creating for a good reversal possibility. What was needed at this point to get in the trade? Confirmation of the candlestick signal. This confirmation came the next day with bulls taking control and closing the stock higher. A stock rallied hard from that point on for a sizable gain.
Chart courtesy icharts.in