Engulfing

Engulfing

• Direction: Bearish
• Type: Reversal
• Reliability: Moderate


• In an established uptrend, an average to small sized blue candle occurs on day-one.
• In the second day a longer red candle forms
• Ideally with a red candles high is above the previous days high.
• The strength of the signal is additionally increased by the further the red candle closes below the low of the blue day.

The Bearish Engulfing is one of the more clear-cut two day bearish reversal patterns. The formation reflects sellers overtaking buying strength, and often precedes a fall in price.

• Day-One Characteristics for Signal Strength
The first day may even appear as a Doji, and the smaller day-one is and larger the second day is, the stronger the reversal signal. Dojis and small candles reflect uncertainty in the markets trend, thus the smaller the first days candle the better the signal of an end to the established bull trend.

• Day-Two Characteristics for Signal Strength
The second day bear move acts to confirm the death to the bull trend. The bigger the red candle reflects the deeper the bear move and the better the reversal signal.

• Overall Characteristics for Signal Strength
This pattern is also more meaningful if it follows a lengthy bull trend, or a recent fast move up. Both these cases suggest the market may be overbought and more apt for a reversal.

Bearish Engulfing patterns also provide resistance levels for where the highest level of price action reached. In the future this level may be difficult to break.