The candlestick pattern Matching Lows is a formation of two bearish candles presented in markets with a downward trend. It has a moderate reliability and indicates that the price is likely to change from bearish to bullish trend. This pattern can be identified as follows:
- The current market trend is bearish.
- During the first period a big black candle is formed.
- In the second period there is a shorter black candle which has a close that is equal or almost equal to the close of the first candle.
If the market is in a downtrend and we see a big black candle, that is a clear sign that bearish forces still have control over the price action in the market. Also, if in the next period the price opens above the closing price of the previous candle (the big black candle) but before long this upward force fades and loss its momentum because of the pressure of sales positions so that at the end the candle closes at a price equal to or slightly different from the closing price of the previous candle, this may mean that close to that level is a support and therefore the price is going to spend some time testing that price level.
Under this situation, bearish forces should be alert and should be aware that there is an important support that the price can not break. Therefore, intelligent traders act with caution because if they ignore this trend reversal pattern they may suffer problems for a possible movement against the trend.
In this case, the Matching Lows pattern is a clear signal that the price is in a short term support which may cause that the market present a change in the trend during the next period, which depends of course on the volume of transactions accompanying the potencial change.
It is essential to keep in mind that although this pattern indicate a possible change in the market trend, the formation itself consists of two identical minimum (or nearly identical), but because these are increasingly smaller candles, the highs are getting lower which entails an implicit danger because the price could be making a trend continuation pattern along with a pause from which it will continue the prevailing downtrend. This continuation pattern may come in the form of a traditional triangle (traditional chartist analysis).
For this reason, it is absolutely necessary to seek confirmation of the signal before opening a buy position based on this pattern. The first sign of confirmation is that during the third period the price reaches at least a value higher than the decreasing last minimum of the two previous candles.