Definition: Get the highest rated stock from Americanbulls for this 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.
Recognition Criteria:
1. Market is characterized by uptrend.
2. We see a white candlestick in the first day.
3. Then we see a black candlestick that completely engulfs
the real body of the first day.
Explanation:
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.
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 longs 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 more possible if there is heavy
volume on the second real body or if the second day
of the Bearish Engulfing Pattern engulfs more than one
real body.
A confirmation in 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.
