BEARISH ENGULFING
Definition
This pattern is characterized by a large black candlestick engulfing a preceding smaller white candlestick, which appears during an uptrend. The black candlestick does not necessarily engulf the shadows of the white candlestick but completely engulfs the body itself. This is an important top reversal signal.
Recognition Criteria
1. The market is currently defined by a dominant upward trend.
2. A white body is observed on the first day.
3. The black body that is formed on the second day completely engulfs the white body of the preceding day.
Pattern Requirements and Flexibility
The length of the first white candlestick is not critical; it can even be a Doji. The second candlestick, however, must be a normal or long black candlestick. Either the body tops or the body bottoms of the two candlesticks can be at the same level, but in any case, the black body of the Bearish Engulfing Pattern should be longer than the previous white body.
Trader’s Behavior
While the market is characterized by a definite uptrend, a lower volume of buying is observed with the occurrence of a white candlestick on the first day. The next day, the market opens at new highs, suggesting more bullish trading. However, the uptrend loses momentum, and the bears take control during the day. The selling pressure outweighs the buying, and the market ultimately closes below the previous day’s open. This damages the uptrend.
Sell/Stop-Loss Levels
The confirmation level is defined as the last close. Prices must drop below this level for confirmation.
The stop loss level is defined as the last high. Following the bearish signal, if prices rise instead of falling and either close above or make two consecutive daily highs above the stop loss level, without detecting any bullish pattern, the stop loss is triggered.