Type: Reversal; Relevance: Bearish; Prior Trend: Bullish; Reliability: Medium; Confirmation: Suggested; No. Of Sticks: 2
Definition:
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.
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