CDL_INNECK (In-Neck Pattern)

Overview

The In-Neck pattern is a two-candle bearish continuation pattern that appears during a downtrend. It consists of a long black candle followed by a white candle that closes near or at the low of the previous candle. This pattern suggests that despite a brief attempt to rally, selling pressure remains dominant and the downtrend is likely to continue. The In-Neck pattern is considered a weak reversal signal and primarily indicates continuation.

Parameters

Parameter	Type	Default	Description
open	Array	Required	Array of opening prices for each period
high	Array	Required	Array of high prices for each period
low	Array	Required	Array of low prices for each period
close	Array	Required	Array of closing prices for each period

Parameter Details

Note: Array elements should be ordered from oldest to newest (chronological order)

open - Array of opening prices for the analyzed time series - Must have the same length as high, low, and close arrays - Used to determine candle body size and direction

high - Array of high prices for each period - Used to identify the upper range of price movement - Helps determine pattern validity

low - Array of low prices for each period - Critical for identifying the "neck line" where second candle closes - Used to measure support levels

close - Array of closing prices for each period - Used to determine candle color and body size - Essential for pattern recognition

Usage

Basic Usage

require 'sqa/tai'

# Example price data showing downtrend with In-Neck pattern
open =  [50.00, 48.50, 47.00, 46.80]
high =  [50.20, 48.80, 47.20, 47.50]
low =   [48.30, 46.90, 46.70, 46.60]
close = [48.50, 47.00, 46.80, 46.90]

pattern = SQA::TAI.cdl_inneck(open, high, low, close)

puts "Pattern signal: #{pattern.last}"
# 0 = no pattern, -100 = bearish continuation

Analyzing Pattern Signals

# Monitor for bearish continuation signals
pattern.each_with_index do |signal, idx|
  if signal == -100
    puts "Bearish In-Neck pattern at index #{idx}"
    puts "Price: #{close[idx]}, downtrend likely to continue"
  end
end

Combining with Trend Indicators

# Use with moving average for confirmation
require 'sqa/tai'

pattern = SQA::TAI.cdl_inneck(open, high, low, close)
ma50 = SQA::TAI.sma(close, 50)

current_signal = pattern.last
current_price = close.last

if current_signal == -100 && current_price < ma50.last
  puts "In-Neck pattern confirmed by downtrend - strong bearish signal"
  puts "Consider exiting long positions or entering short"
end

Understanding the Indicator

What It Measures

The In-Neck pattern measures the strength of selling pressure during a downtrend. When a white candle appears but can only close at or near the previous candle's low, it indicates: - Failed rally attempt - Strong resistance at previous low levels - Sellers maintaining control despite buying pressure - High probability of continued decline

This pattern is significant because the market attempts to bounce but fails to recover, demonstrating that bears remain firmly in control.

Pattern Structure

In-Neck Pattern (Bearish Continuation): 1. First candle: Long black candle in an established downtrend 2. Second candle: White candle that: - Opens below the previous close - Rallies during the session - Closes near or at the previous candle's low (the "neck line") - Fails to close significantly above the previous low

The critical element is that the second candle closes near the first candle's low, creating a "neck line" that acts as resistance.

Indicator Characteristics

• Range: Returns -100 (bearish continuation) or 0 (no pattern)
• Type: Bearish continuation pattern (two-candle formation)
• Frequency: Relatively common in downtrends
• Best Used: During established downtrends with clear selling pressure
• Reliability: Moderate; works best when confirmed with other indicators

Interpretation

Signal Values

• -100: Bearish In-Neck pattern detected - downtrend expected to continue
• 0: No pattern present at this position

Pattern Recognition

Bearish Continuation Signal (-100): - Appears during an established downtrend - First candle shows strong selling with a long black body - Second candle attempts to rally but closes at or near first candle's low - The "neck line" (first candle's low) acts as resistance - Indicates sellers remain in control despite brief buying pressure

Market Psychology

The In-Neck pattern reveals important market dynamics: - Initial Decline: Long black candle shows strong selling pressure - Failed Rally: White candle attempts recovery but fails - Resistance at Neck Line: Previous low becomes resistance level - Renewed Selling: Failure to break above neck line invites more selling - Continuation Bias: Pattern confirms downtrend will likely continue

Trading Signals

Sell Signals

When the In-Neck pattern appears (-100):

1. Entry Point: Enter short position at the close of the second candle or on a breakdown below the neck line
2. Confirmation: Verify pattern occurs in an established downtrend
3. Stop Loss: Place stop above the high of the second candle

Example Scenario:

# Detect In-Neck pattern and generate trading signal
if pattern.last == -100
  entry_price = close.last
  pattern_high = [high[-2], high[-1]].max
  stop_loss = pattern_high * 1.02
  risk = stop_loss - entry_price
  target = entry_price - (2 * risk)

  puts "SELL Signal: In-Neck Pattern Detected"
  puts "Entry: $#{entry_price.round(2)}"
  puts "Stop Loss: $#{stop_loss.round(2)}"
  puts "Target: $#{target.round(2)}"
  puts "Risk/Reward: 1:2"
end

Exit Signals for Long Positions

For traders holding long positions:

1. Exit Point: Close long positions when In-Neck pattern completes
2. Partial Exit: Consider reducing position size immediately
3. Trailing Stop: Tighten stop losses to protect profits

Example Scenario:

# Exit long position on In-Neck pattern
if pattern.last == -100 && position == :long
  puts "WARNING: In-Neck pattern detected"
  puts "Recommendation: Exit long position"
  puts "Current Price: $#{close.last}"
  puts "Downtrend continuation expected"
end

Best Practices

Optimal Use Cases

This pattern works best in: - Established downtrends: Clear downward price movement required - After significant decline: Pattern more reliable after sustained selling - Near resistance levels: Added confirmation when pattern forms at resistance - Time frames: Most reliable on daily charts; also effective on 4-hour charts - Volume confirmation: Decreasing volume on second candle strengthens signal

Combining with Other Indicators

With Trend Indicators: - Moving Averages: Price should be below key MAs (20, 50, 200-day) - ADX: ADX above 25 confirms strong downtrend - MACD: MACD below signal line confirms bearish momentum

With Volume Indicators: - Volume Analysis: High volume on first candle, lower on second - On-Balance Volume (OBV): Declining OBV confirms selling pressure - Volume decrease: Lower volume on second candle shows weak buying

With Support/Resistance: - Resistance Levels: Pattern more significant at known resistance - Previous Lows: Neck line at previous support turned resistance - Fibonacci Levels: Pattern at Fibonacci retracement adds confirmation

Common Pitfalls

1. Trading Against Major Support: Avoid pattern near strong support levels
2. Ignoring Overall Trend: Pattern requires established downtrend
3. Confusing with On-Neck: In-Neck closes at low; On-Neck closes below low
4. Missing Volume Confirmation: Pattern stronger with appropriate volume
5. Weak Downtrend Context: Pattern less reliable in ranging or weak downtrends

Risk Management Guidelines

Stop Loss Placement: - Initial Stop: Above the high of the second candle - Alternative Stop: Above recent swing high - Buffer: Add 1-2% for volatility - Time Stop: Exit if pattern doesn't follow through within 3-5 bars

Position Sizing: - Risk no more than 1-2% of account per trade - Consider smaller positions due to moderate reliability - Scale into position after confirmation

Practical Example

Complete trading scenario:

require 'sqa/tai'

# Historical data showing downtrend
open =  [52.00, 51.00, 50.00, 48.50, 47.00, 46.80, 46.00]
high =  [52.50, 51.20, 50.20, 48.80, 47.20, 47.50, 46.50]
low =   [50.90, 49.80, 48.30, 46.90, 46.70, 46.60, 45.50]
close = [51.00, 50.00, 48.50, 47.00, 46.80, 46.90, 45.80]

# Calculate indicators
pattern = SQA::TAI.cdl_inneck(open, high, low, close)
sma_20 = SQA::TAI.sma(close, 5)  # Using 5 for short data
adx = SQA::TAI.adx(high, low, close, 5)

# Analysis
current_signal = pattern.last
current_price = close.last
in_downtrend = current_price < sma_20.last

if current_signal == -100 && in_downtrend
  puts "=" * 50
  puts "IN-NECK BEARISH CONTINUATION PATTERN"
  puts "=" * 50
  puts "Current Price: $#{current_price}"
  puts "Pattern Signal: #{current_signal}"
  puts "Below 20 SMA: #{in_downtrend}"
  puts ""

  # Calculate trade parameters
  entry = current_price
  pattern_high = [high[-2], high[-1]].max
  stop = pattern_high * 1.02
  risk = stop - entry
  target = entry - (2 * risk)

  puts "SHORT TRADE SETUP:"
  puts "Entry: $#{entry.round(2)}"
  puts "Stop Loss: $#{stop.round(2)}"
  puts "Target: $#{target.round(2)}"
  puts "Risk per share: $#{risk.round(2)}"
  puts ""
  puts "STRATEGY:"
  puts "- Enter short at market"
  puts "- Place stop above pattern high"
  puts "- Take profit at 2x risk target"
  puts "- Monitor for breakdown below neck line"
end

Related Indicators

Similar Patterns

• On-Neck Pattern: Similar but second candle closes below first candle's low
• Thrusting Pattern: Second candle closes slightly higher into first candle's body
• Dark Cloud Cover: Stronger bearish reversal pattern

Complementary Patterns

• Bearish Engulfing: Stronger bearish signal
• Evening Star: Bearish reversal pattern
• Three Black Crows: Strong bearish continuation

Indicator Combinations

• RSI: RSI below 50 confirms bearish momentum
• Moving Averages: Price below MAs confirms downtrend
• Volume: Volume pattern confirms selling pressure

Advanced Topics

Multi-Timeframe Analysis

For stronger confirmation: 1. Identify In-Neck pattern on trading timeframe (daily) 2. Confirm downtrend on higher timeframe (weekly) 3. Use lower timeframe (4-hour) for precise entry 4. Wait for breakdown below neck line on lower timeframe

Pattern Variations

• Perfect In-Neck: Second candle closes exactly at first candle's low
• Near In-Neck: Second candle closes within 1% of first candle's low
• Volume Pattern: High volume on first candle, declining volume on second

Statistical Considerations

Research by Thomas Bulkowski suggests: - Success rate: Approximately 56-62% for continuation - Average decline: 3-7% after pattern completion - Time to target: Usually achieved within 10-15 trading days - Performance better in strong downtrends

References

• "Japanese Candlestick Charting Techniques" by Steve Nison
• "Encyclopedia of Candlestick Charts" by Thomas Bulkowski
• "The Candlestick Course" by Steve Nison
• "Technical Analysis of the Financial Markets" by John J. Murphy

See Also

• Pattern Recognition Overview
• Bearish Continuation Patterns
• On-Neck Pattern
• Back to Indicators