CDL_ONNECK (On-Neck Pattern)

Overview

The On-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 at or slightly below the low of the previous candle. This pattern is similar to the In-Neck pattern but with the second candle closing even lower, indicating stronger selling pressure and a higher probability of downtrend 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 "on-neck" line where second candle closes - Used to measure support breakdown

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 On-Neck pattern
open =  [50.00, 48.50, 47.00, 46.70]
high =  [50.20, 48.80, 47.20, 47.40]
low =   [48.30, 46.90, 46.70, 46.50]
close = [48.50, 47.00, 46.70, 46.65]

pattern = SQA::TAI.cdl_onneck(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 On-Neck pattern at index #{idx}"
    puts "Price: #{close[idx]}, strong downtrend continuation expected"
  end
end

Combining with Support Levels

# Use with support/resistance for confirmation
require 'sqa/tai'

pattern = SQA::TAI.cdl_onneck(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 "On-Neck pattern breaking below support - very bearish"
  puts "Consider aggressive short positions"
end

Understanding the Indicator

What It Measures

The On-Neck pattern measures the failure of a rally attempt during a downtrend, with the second candle closing at or below the first candle's low. This indicates: - Complete rejection of rally attempts - Breakdown of support at previous low - Strong selling pressure overwhelming buyers - High probability of continued sharp decline

This pattern is more bearish than the In-Neck pattern because the second candle not only fails to rally but actually closes at or below the previous low, showing extreme weakness.

Pattern Structure

On-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 (gaps down) - Attempts to rally during the session - Closes at or slightly below the previous candle's low - Shows complete failure to hold above the "neck line"

The key difference from In-Neck: On-Neck closes AT or BELOW the first candle's low, while In-Neck closes NEAR but above the low.

Indicator Characteristics

• Range: Returns -100 (bearish continuation) or 0 (no pattern)
• Type: Bearish continuation pattern (two-candle formation)
• Frequency: Less common than In-Neck, more reliable
• Best Used: During strong downtrends with clear selling dominance
• Reliability: Moderate to high; stronger signal than In-Neck pattern

Interpretation

Signal Values

• -100: Bearish On-Neck pattern detected - strong downtrend continuation expected
• 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 gaps down, attempts rally, but closes at/below first candle's low - The "on-neck" close demonstrates complete support failure - Indicates bears are firmly in control with no viable support

Market Psychology

The On-Neck pattern reveals critical market dynamics: - Initial Decline: Long black candle confirms strong selling - Gap Down Open: Market opens lower, showing overnight weakness - Failed Recovery: White candle attempts recovery but completely fails - Support Breakdown: Close at/below previous low breaks support - Capitulation Signal: Buyers give up, sellers dominate completely - Continuation Certainty: Pattern strongly suggests more downside ahead

Trading Signals

Sell Signals

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

1. Entry Point: Enter short at close of second candle or on breakdown below pattern
2. Confirmation: Verify pattern occurs in strong downtrend with volume
3. Stop Loss: Place stop above the high of the second candle
4. Target: Project distance from pattern to next support level

Example Scenario:

# Detect On-Neck pattern and generate aggressive short signal
if pattern.last == -100
  entry_price = close.last
  pattern_high = [high[-2], high[-1]].max
  stop_loss = pattern_high * 1.015
  risk = stop_loss - entry_price
  target = entry_price - (2.5 * risk)  # More aggressive target

  puts "STRONG SELL Signal: On-Neck Pattern Detected"
  puts "Entry: $#{entry_price.round(2)}"
  puts "Stop Loss: $#{stop_loss.round(2)}"
  puts "Target: $#{target.round(2)}"
  puts "Risk/Reward: 1:2.5"
  puts "Support broken - expect accelerated decline"
end

Exit Signals for Long Positions

For traders holding long positions:

1. Immediate Exit: Close all long positions when On-Neck pattern completes
2. No Partial Exit: Pattern too bearish for partial positions
3. Consider Reversal: May warrant opening short position

Example Scenario:

# Urgent exit signal for long positions
if pattern.last == -100 && position == :long
  puts "URGENT: On-Neck pattern detected - STRONG BEARISH"
  puts "Recommendation: Exit ALL long positions immediately"
  puts "Current Price: $#{close.last}"
  puts "Support broken - sharp decline expected"
  puts "Consider reversing to short position"
end

Short Entry Strategy

# Complete short strategy with On-Neck pattern
if pattern.last == -100
  # Verify downtrend strength
  recent_lows = low[-10..-1]
  declining_lows = recent_lows.each_cons(2).all? { |a, b| b < a }

  if declining_lows
    puts "ON-NECK PATTERN IN STRONG DOWNTREND"
    puts "High probability short setup"
    puts ""
    puts "Entry triggers:"
    puts "1. Immediate entry at market"
    puts "2. Or wait for break below #{close.last - 0.10}"
    puts "3. Add to position on continuation"
  end
end

Best Practices

Optimal Use Cases

This pattern works best in: - Strong established downtrends: Clear persistent selling pressure - After significant decline: Pattern more reliable after sustained move down - Breaking support: Pattern at key support levels increases significance - High volume context: High volume on both candles confirms pattern - Time frames: Most reliable on daily charts; very effective on weekly charts

Combining with Other Indicators

With Trend Indicators: - Moving Averages: Price well below all major MAs (20, 50, 200-day) - ADX: ADX above 30 confirms very strong downtrend - MACD: MACD well below signal line with increasing separation - Parabolic SAR: SAR dots above price confirming downtrend

With Volume Indicators: - Volume Analysis: High volume on both candles critical - On-Balance Volume (OBV): Sharply declining OBV confirms pattern - Accumulation/Distribution: Declining line confirms distribution - Volume Surge: Increasing volume validates support breakdown

With Momentum Indicators: - RSI: RSI below 40, ideally below 30 - Stochastic: In oversold territory but not turning up - CCI: Below -100 confirming bearish momentum

Common Pitfalls

1. Trading Near Major Support: Avoid pattern at very strong historical support
2. Low Volume Pattern: Pattern much less reliable without volume confirmation
3. Confused Identification: Ensure close is AT or BELOW first candle's low
4. Weak Downtrend: Pattern requires strong pre-existing downtrend
5. Oversold Bounce Risk: Be cautious if RSI below 20 (potential bounce)

Risk Management Guidelines

Stop Loss Placement: - Tight Stop: Just above second candle's high (aggressive) - Standard Stop: 1-2% above pattern high - Swing Stop: Above recent swing high - Time Stop: Exit if no follow-through in 2-3 bars

Position Sizing: - Can use larger position size due to higher reliability - Still risk no more than 2% of account - Consider scaling in after initial confirmation - Trail stops as profit develops

Profit Targets: - Target 1: 1.5x risk (take partial profit) - Target 2: 2.5x risk (main target) - Target 3: Trail stop for extended move - Next Support: Project to next major support level

Practical Example

Complete trading scenario:

require 'sqa/tai'

# Historical data showing strong downtrend
open =  [55.00, 53.00, 51.00, 49.50, 47.50, 46.70, 45.00]
high =  [55.50, 53.20, 51.30, 49.80, 47.80, 47.40, 45.50]
low =   [52.80, 50.80, 49.30, 47.30, 46.60, 46.50, 44.20]
close = [53.00, 51.00, 49.50, 47.50, 46.70, 46.55, 44.50]

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

# Analysis
current_signal = pattern.last
current_price = close.last
in_strong_downtrend = current_price < sma_20.last
rsi_bearish = rsi.last < 50

if current_signal == -100 && in_strong_downtrend
  puts "=" * 60
  puts "ON-NECK BEARISH CONTINUATION PATTERN DETECTED"
  puts "=" * 60
  puts "Current Price: $#{current_price}"
  puts "Pattern Signal: #{current_signal}"
  puts "Below 20 SMA: #{in_strong_downtrend}"
  puts "RSI: #{rsi.last.round(2)} (bearish: #{rsi_bearish})"
  puts ""

  # Calculate trade parameters
  entry = current_price
  pattern_high = [high[-2], high[-1]].max
  stop = pattern_high * 1.015
  risk = stop - entry

  target1 = entry - (1.5 * risk)
  target2 = entry - (2.5 * risk)
  target3 = entry - (4.0 * risk)

  puts "AGGRESSIVE SHORT TRADE SETUP:"
  puts "-" * 60
  puts "Entry Price: $#{entry.round(2)}"
  puts "Stop Loss: $#{stop.round(2)}"
  puts "Risk per share: $#{risk.round(2)}"
  puts ""
  puts "PROFIT TARGETS:"
  puts "Target 1 (50% exit): $#{target1.round(2)} - 1.5R"
  puts "Target 2 (30% exit): $#{target2.round(2)} - 2.5R"
  puts "Target 3 (trail 20%): $#{target3.round(2)} - 4.0R"
  puts ""
  puts "RATIONALE:"
  puts "- Strong downtrend confirmed"
  puts "- Support level broken at #{low[-2]}"
  puts "- Failed rally shows weakness"
  puts "- RSI confirms bearish momentum"
  puts ""
  puts "EXECUTION PLAN:"
  puts "1. Enter short at market open"
  puts "2. Place stop at $#{stop.round(2)}"
  puts "3. Scale out at targets"
  puts "4. Trail stop on remaining position"
end

Related Indicators

Similar Patterns

• In-Neck Pattern: Similar but less bearish (closes near vs at/below low)
• Thrusting Pattern: Second candle closes slightly higher into body
• Piercing Line: Bullish counterpart pattern
• Dark Cloud Cover: Bearish reversal pattern

Complementary Patterns

• Bearish Engulfing: Another strong bearish signal
• Three Black Crows: Strong bearish continuation
• Evening Star: Bearish reversal at tops
• Shooting Star: Bearish reversal signal

Indicator Combinations

• RSI: Confirms bearish momentum
• ADX: Validates trend strength
• Moving Averages: Confirms downtrend structure
• MACD: Shows bearish divergence

Advanced Topics

Multi-Timeframe Analysis

For optimal confirmation: 1. Weekly Chart: Confirm major downtrend 2. Daily Chart: Identify On-Neck pattern 3. 4-Hour Chart: Time precise entry 4. 1-Hour Chart: Monitor for follow-through

All timeframes should align bearishly for highest probability trades.

Pattern Variations and Reliability

High Reliability Indicators: - Close more than 0.5% below first candle's low - High volume on both candles - Occurs at broken support level - Part of larger bearish pattern complex

Lower Reliability Indicators: - Close exactly at (not below) first candle's low - Low volume on second candle - No support level nearby - Oversold conditions present

Statistical Performance

Research by Thomas Bulkowski: - Success rate: Approximately 63-67% for continuation - Average decline: 5-10% after pattern completion - Time to target: Usually 8-20 trading days - Break-even failure rate: About 33% - Works better in bear markets than bull markets

Market Context Considerations

Best Market Conditions: - Bear market environment - Sector rotation away from stock - Negative news flow - Increased market volatility

Caution Conditions: - Extreme oversold readings (RSI < 20) - Major support nearby - Positive divergences forming - Market turning bullish

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
• "Trading Classic Chart Patterns" by Thomas Bulkowski

See Also

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