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Wednesday, October 10, 2007

Major Candlestick Chart Patterns: BULLISH vs. BEARISH ENGULFING

Both Bullish & Bearish Engulfing are reversal patterns.
Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Bullish Engulfing Pattern) or an uptrend (Bearish Engulfing Pattern).

Basically, these patterns consist of 2 candles:
The first day is characterized by a small body candle, followed by a candle whose body completely engulfs the previous day's body.
Shadows are not a consideration.




BULLISH ENGULFING PATTERN
Bullish Engulfing is a bottom reversal pattern / bullish reversal pattern.
It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

Price has been declining for some time. Then a small black/red body occurs with low volume (1st day).
The next day (2nd day), the stock opens at new lows (below the close of the previous day’s candle) and then rises. The rise is accomplished by high volume, and finally closes above the open of the previous day, forming a long white candlestick.
In other words, the 2nd candle’s body (white candle) completely engulfs the 1st candle’s body (black/red candle).
This indicates buying pressure has overwhelmed the selling pressure, suggesting a potential reversal of trend.
If the following day the price is able to close higher, it provides confirmation to this bullish reversal pattern.

BEARISH ENGULFING PATTERN
Bearish Engulfing is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

Price has been in a rally for some time. Then, a small white body occurs with low volume (1st day).
The next day (2nd day), the stock opens at new highs (above the close of the previous day’s candle) and then falls. The fall is accomplished by strong volume and finally closes below the open of the previous day, forming a long black/red candlestick.
In other words, the 2nd candle’s body (black/red candle) completely engulfs the 1st candle’s body (white candle).
This indicates sellers (bears) have overwhelmed the buyers (bulls), suggesting a potential reversal of trend.
If the following day the price is able to close lower, it provides confirmation to this bearish reversal pattern.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Topics:
* Learning Charts Patterns
* Trading Videos on Technical Analysis You Should Not Miss
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

1 comments:

Tony Chai said...

Hi OTB :

Nice article about engulfing candle chart pattern.

Just to add on - it's important to monitor the candles a few days after an engulfing candle pattern to confirm the trend before entering a position.

I've attached a chart of BIDU to illustrate what I mean - a picture speaks a thousand words :)

Q3 earnings season has kick-started & some of the big cap tech cos. like YHOO, EBAY, GOOG would be reporting next week.

Happy Profitable Trading :)

Yours Truly,

Tony Chai
My Options Trading Blog