Business, Legal & Accounting Glossary
The Bearish Engulfing Pattern candlestick formation is a bearish reversal pattern, appearing at the end of an uptrend.
The bearish engulfing pattern is a relatively simple candlestick charting pattern consisting of one white candle followed by a longer black candle — it is a bearish reversal pattern. The body of the white candle in a bearish engulfing pattern may be of any length. The body of the black candle in a bearish engulfing pattern completely covers or “engulfs” the body of the preceding. That is, the black candle in a bearish engulfing pattern opens higher than the white candle’s closing price and closes lower than the white candle’s opening price. In an ideal bearish engulfing pattern, the body of the black candle will also engulf the white candle’s shadows but it is not a requirement. The bearish engulfing pattern signals a negative reversal in sentiment regarding a stock, commodity, index, etc. If a stock is overbought or has been in an uptrend, technical analysts tend to view the bearish engulfing pattern as a fairly reliable bearish signal. Market technicians further tend to believe the longer the black candle and the greater its coverage of the white candle, the stronger the reversal indicated by the bearish engulfing pattern.
The first day of the Bearish Engulfing Pattern is characterized by a small body with the same colour as the current trend. The candlestick on the second day has a body that completely engulfs the previous day’s body and is the opposite colour.
The second day opens higher than the previous days close, then it trades lower so, by the end of the day, it will close below the previous days open. The Bearish Engulfing Pattern is the exact opposite that of the Bullish Engulfing Pattern.
The Bearish Engulfing Pattern represents a change in investor sentiment, revealed on Day 2 when the sellers step in. The bigger the previous day’s candle being engulfed, the more effective the new trend signal will be. Or the higher the open of the signal candle, then retreating downward to engulf the previous day, the more powerful the next downtrend should be. The signals work equally well when analyzing indexes as they do for individual stocks or any other trading entity.
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This glossary post was last updated: 23rd March, 2020 | 4 Views.