Saturday, January 28, 2023

Bearish Engulfing

A bearish engulfing pattern is made up of two candlesticks, one after another, and forms during an advance, up-trend, or where there is potential support.

The first candlestick has a white body (close higher than open). Shadows are fairly short, if any. The second candlestick has a black body (close lower than open) that is larger than the white body of the first candlestick and completely covers, or engulfs, the white body. The necessary conditions for this to happen are: 1) the open of the second candlestick must be higher than the close of the first, and 2) the close of the second must be lower than the previous open.

The first white candlestick signals a bullish period due to the security closing higher than the open. For the second candlestick, the bullishness continued at the open as it had a higher open than the previous close. However, selling pressure surfaced later on and pushed the security to close below the previous open, hence the bearish engulfing pattern. In fact, if analyzed further, if one would combine the two candlesticks by taking the open of the first and the close of the second, a shooting star is formed, which also represents a bearish formation.

And as with most patterns, price action prior to and immediately after the bearish engulfing pattern needs to be analyzed for a confirmation for the bears.

In the above example, the price was in an up-trend before a little indecisiveness among the bulls and the bears. The price consolidated for a few days near the highs of the up-trend then the bearish engulfing pattern formed. The next day, the price continued downwards with a long black candlestick, which is considered very bearish, on heavy volume, and thus, confirmed the previous day’s bearish signal.

Chart Patterns Explained

Continuation Patterns

Reversal Patterns

Candlestick Patterns

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