Bearish Engulfing Pattern

The bearish engulfing pattern is a chart pattern that consists of a small green candlestick (or white) with short shadows or tails followed immediately by a large red (or black) candlestick that engulfs the green (or white) candlestick. To simplify, engulfing patterns are when the body of the second candlestick engulfs the first and are considered reversal patterns. When determining engulfing patterns, certain conditions must be met. First, the second real body should have the opposite color of the first real body. Second, the second day’s body should completely engulf the previous day’s body. The first day’s color indicates to the trader the trend of the trading day. In order to be considered a bearish engulfing pattern, the second day of the signal should be a red (or black) candle opening above the close of the previous day and closing below the open on the previous day’s green (or white) candle. It is found at the top of an uptrend, meaning the stock must be in a definite uptrend before this signal occurs. It is important to note that this signal often follows or completes the doji (doji candlestick chart), the hammer, or the gravestone patterns.

What does the bearish engulfing pattern indicate is happening in the markets?
This pattern typically is accompanied by an uptrend in a security and can indicate a peak or a slowdown in its advancement. It may signal a future bearish trend which means that the bears are overwhelming the bulls and prices will move down. The second red (or black) candlestick begins to form, after an advance, and when residual buying pressure causes the security to open above the previous close. Sellers then begin to drive the prices down and by the end of the session, the prices will move below the previous open. As a result, the second candlestick (red or black) engulfs the previous day’s body and creates an apparent short-term reversal. The bearish engulfing pattern creates a very strong probability that the buying is over and that there is opportunity for creating a good short position.

This pattern is the exact opposite of the bullish engulfing pattern. Both indicate reversals at the tops and the bottoms and are easily recognized indicators at the end of a trend. The signals are extremely accurate when a bullish engulfing pattern occurs during oversold conditions, and the bearish engulfing signal is equally valid when it occurs in the overbought area.

Japanese candlesticks can make investing in the stock market much easier to learn and to understand. When the engulfing signal is broken down, the investor can get a clear understanding of the investors’ sentiment that caused the reversal.

Continue your Japanese candlestick education and read about the candlestick hammer signal.