How to identify the top signal of the 60-minute dark cloud cover + daily volume shrinkage?

A 60-minute dark cloud cover with daily volume below the 20-day average signals strong reversal potential, especially at resistance or overbought levels.

Jul 26, 2025 at 10:57 am

Understanding the 60-Minute Dark Cloud Cover Pattern

The 60-minute dark cloud cover is a bearish reversal candlestick pattern that typically forms after an uptrend. It consists of two candles: the first is a long bullish (green) candle, followed by a bearish (red) candle that opens above the high of the previous candle but closes below its midpoint. This pattern suggests weakening bullish momentum and potential short-term reversal. Traders pay close attention to this formation because it often signals a shift in sentiment within a relatively short time frame.

Key characteristics include:

• The first candle is a strong green candle indicating continued buying pressure.
• The second candle opens with a gap up, showing initial bullish continuation.
• However, the price drops sharply during the period, and the close lands below the midpoint of the prior green candle.
• Ideally, the second candle should close near its low, indicating strong selling pressure.

It's crucial to confirm the pattern with volume and surrounding price action. A dark cloud cover appearing at a resistance level or after an extended rally increases its reliability. The 60-minute timeframe provides a balance between noise reduction and timely signals, making it popular among swing and intraday traders.

Daily Volume Shrinkage: A Sign of Diminishing Momentum

Daily volume shrinkage refers to a noticeable decline in trading volume over one or more days compared to recent averages. In the context of identifying reversal signals, shrinking volume during an uptrend suggests that fewer participants are driving the price higher, which may indicate exhaustion. When volume contracts while price continues to rise, the move lacks broad market participation and becomes vulnerable to reversal.

Important aspects of volume shrinkage:

• Compare current daily volume to a 20-day moving average of volume to determine if it's below normal.
• Volume shrinkage at new highs is especially concerning—it hints at a lack of conviction.
• When combined with a bearish candlestick pattern like the dark cloud cover, shrinking volume strengthens the reversal signal.

Volume is a leading indicator of trend sustainability. A healthy uptrend should be accompanied by rising volume on up days and lower volume on down days. When volume fails to confirm price movement, it creates a divergence that technical analysts view as a warning sign.

Combining the 60-Minute Dark Cloud Cover with Daily Volume Shrinkage

To identify the top signal using both indicators, traders must synchronize data across timeframes. The process involves analyzing the 60-minute chart for the dark cloud cover pattern while simultaneously reviewing the daily chart for volume trends.

Steps to verify the combined signal:

• Identify a clear uptrend on the daily chart.
• Monitor the 60-minute chart for the appearance of a dark cloud cover pattern.
• Confirm that the daily volume on the day of or preceding the dark cloud cover is below the 20-day average volume.
• Ensure the dark cloud cover forms near a known resistance level or overbought condition (e.g., RSI > 70).

When both conditions align—bearish reversal pattern on the 60-minute chart and declining volume on the daily chart—the probability of a price top increases. This confluence suggests that buyers are losing control and sellers may soon dominate.

Practical Steps to Spot the Signal on Trading Platforms

Using platforms like TradingView or MetaTrader, traders can systematically scan for this signal.

Here’s how to set it up:

• Open the 60-minute chart of the cryptocurrency pair (e.g., BTC/USDT).
• Apply a candlestick chart style and visually inspect for the dark cloud cover pattern.
• Use the "Auto Chart Pattern Recognition" tool or manually draw trendlines to confirm the prior uptrend.
• Switch to the daily chart and add a volume oscillator or volume moving average (20-period).
• Observe whether the latest 1–2 daily candles show volume bars below the moving average line.
• Overlay technical indicators like RSI (14) to check for overbought conditions on the daily timeframe.

For automation:

• Create a custom alert in TradingView using Pine Script to detect dark cloud cover patterns.
• Combine the script with a volume condition: volume < sma(volume, 20).
• Example Pine Script logic snippet:

  isDarkCloud = close[1] > open[1] and close < open and open > high[1] and close < (high[1] + low[1]) / 2
  volShrink = volume < sma(volume, 20)
  alertcondition(isDarkCloud and volShrink, title="Top Signal", message="Dark Cloud + Low Volume")

This setup enables real-time monitoring without constant manual chart checks.

Risk Management and Entry/Exit Considerations

Even with a strong signal, risk management is essential. The dark cloud cover with volume shrinkage is not a guaranteed reversal—it's a warning sign that requires confirmation.

Recommended actions:

• Do not enter a short position immediately after the pattern forms.
• Wait for the next 60-minute candle to close below the low of the dark cloud cover candle.
• Place a sell limit order slightly below the close of the bearish candle if anticipating continuation.
• Set a stop-loss above the high of the dark cloud cover candle to limit downside risk.
• Use a risk-reward ratio of at least 1:2—target the nearest support level.

Position sizing should reflect the uncertainty of short-term signals. For example, allocate no more than 2–3% of capital per trade when acting on this pattern. Consider using trailing stops if the price moves favorably to lock in profits.

Common Misinterpretations and Pitfalls

Traders often misidentify the dark cloud cover due to improper criteria. A common error is mistaking any red candle after a green one as a dark cloud cover, which is incorrect.

Avoid these mistakes:

• Ignoring the gap-up open—the second candle must open above the prior high.
• Accepting a close only slightly below the midpoint—ideally, it should be well below 50% of the prior candle’s range.
• Overlooking volume context—without shrinking daily volume, the signal loses strength.
• Applying the pattern in choppy or sideways markets where reversals are less meaningful.

Also, in highly volatile cryptocurrencies like meme coins, this pattern may generate false signals due to erratic price swings. Always assess the broader market structure before acting.

Frequently Asked Questions

What is the minimum volume decline required to confirm shrinkage?

Volume should be at least 15–20% below the 20-day average to be considered significant. Minor dips may not indicate real momentum loss.

Can the dark cloud cover appear in downtrends?

Yes, but it’s not a reversal signal in that context. In a downtrend, it may act as a continuation pattern and lacks the bearish significance seen after an uptrend.

How long should I wait for confirmation after the pattern forms?

Wait for the next 60-minute candle to close below the dark cloud cover’s low. This adds reliability and filters out false breakouts.

Does this strategy work on all cryptocurrencies?

It works best on high-liquidity pairs like BTC, ETH, or BNB. Low-cap altcoins often have manipulated volume and erratic candle patterns, reducing signal accuracy.