Bearish Engulfing Pattern

bearish-engulfing-candlestick-pattern

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.

Bearish Engulfing Pattern

Recognition Criteria:

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.

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Explanation:

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.
Important Factors:

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.

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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.

Bearish Engulfing Pattern

 

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