What is a Bearish Engulfing Pattern?
Bearish Engulfing Pattern is a large black real body, which engulfs a small white real body in an uptrend (it need not engulf the shadows). The Bearish Engulfing Pattern is an important top reversal signal.
1. The market is characterized by an uptrend.
2. We see a white candlestick on the first day.
3. Then we see a black candlestick that completely engulfs the real body of the first day.
The market is in a bull mood. Then we see diminished buying reflected by the short, white real body. This then is followed by a strong sell-off, which lead to a close at or below the previous day’s open. Apparently, the uptrend has lost momentum and the bears may be gaining strength.
Relative sizes of the first and second days are important. If the first day of the Bearish Engulfing Pattern is a very small real body (it may even be almost a Doji or is a doji but the second day has a very long real body, this shows the dissipation of the prior uptrend’s force and an increase in bearish force.
A protracted or very fast move increases the chance that potential buyers are already long and that there may be less of a supply of new long in order to keep the market moving up. A fast move makes the market overextended and vulnerable to profit taking. A Bearish Engulfing Pattern appearing after such a move is more likely to be an important bearish reversal indicator.
A bearish reversal is possible if there is a heavy volume of the second real body or if the second day of the Bearish Engulfing Pattern engulfs more than one real body.
A confirmation on the third day is required to be sure that the uptrend has reversed. The confirmation may be in the form of a black candlestick, a large gap down or a lower close on the third day.
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