Introduction
The Piercing Line is often called the “cousin” of the Bullish Engulfing pattern. While it might not look as aggressive, it is a highly reliable reversal signal when found at major support levels.
It represents a market that was free-falling but suddenly found a “floor” strong enough to push prices back up significantly.
How to Identify a Piercing Line
Precision is key here. If it doesn’t meet the “50% rule,” it is not a valid pattern.
- Candle 1 (Bearish): A long Red candle consistent with the downtrend.
- Candle 2 (Bullish): A Green candle that opens below the low of the previous Red candle (a gap down).
- The Recovery: The Green candle must rally and close above the 50% mark (midpoint) of the previous Red candle’s body.
The Psychology
- The Panic: The market gaps down at the open, causing fear among holders. Sellers think the crash is accelerating.
- The Squeeze: Buyers step in at the low prices. They don’t just fill the gap; they push the price deep into the previous day’s territory.
- The Signal: By closing above the midpoint, the bulls have proven they have enough strength to absorb the selling pressure.
How to Trade It
- Context: Look for this specifically at the bottom of a trend channel or Bollinger Band.
- Stop Loss: Below the low of the Green candle.
- Pro Tip: If the Green candle fails to reach the 50% mark, it is called a “Thrusting Line” (a bearish continuation pattern). Do not buy it!