The Psychology: In a downtrend or during a pullback within an uptrend, a bullish Engulfing pattern forms. By itself the pattern has moderate reliability as a reversal indicator, but when the it is followed by another white day (preferably on strong volume), the overall pattern becomes much more reliable.
Although the idea behind the Three Outside Up is to confirm the Bullish Engulfing, in our opinion the extended pattern should be confirmed nevertheless. Confirmation can be in the form of breaking out of the nearest resistance zone or a trendline. What we suggest is to wait for pattern confirmation every time. In any case, a proper usage of a stop loss order always is a must.
1. Wal-Mart: A Three Outside Up pattern is preceded by a price gap forming a resistance zone. The bulls have control by slowly pushing the price higher. To break out of the marked on the chart resistance zone takes much longer but the bulls maintained power.
2. McDonald: A Three Outside Up pattern is preceded by a price gap, similarly as in the previous example. However in this case the bulls were not able to cover the price gap.
MY TEST: NHA @ 12.3 on 23 Jun 2017