Chartered Market Technician (CMT) Practice Exam

What might a gap up followed by a long upper shadow on a candle chart indicate?

1. A continuation of the upward trend

2. A bullish reversal signal

3. A bearish reversal signal

4. A market consolidation

The correct answer is: A bearish reversal signal

A gap up followed by a long upper shadow on a candlestick chart typically indicates a bearish reversal signal. This pattern starts with a gap up, suggesting strong buying interest at the opening and a potential continuation of an upward trend. However, as the trading day progresses, the price experiences a push higher, followed by a significant retracement, which is depicted by the long upper shadow. This implies that, despite initial strength, buyers were unable to sustain that upward momentum, and sellers took control, driving the price back down significantly from its intraday high. As a result, the long upper shadow acts as a warning sign that the buying pressure may be waning, indicating potential weakness and a shift in sentiment. Traders often interpret this pattern as a signal that the market may soon experience a decrease in price, making it a notable indication of a bearish reversal.