In the study of Candlesticks, a bearish engulfing pattern is formed when a small bullish candle is accompanied by a large bearish candle that overshadows or engulf the previous candle. It demonstrates the weakness in a buying trend and pre-indicates a potential selling trend in the market. For instance, the buyers are exhausted and sellers are likely to enter the market.
Bearish Engulfing pattern
The Bearish Engulfing pattern is a two-candlestick pattern that consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that surrounds or “engulfs” the smaller up candle.
Basically, the pattern gets its name because the second candle engulfs the first candle.
The Bearish Engulfing candlestick pattern is considered to be a bearish reversal pattern, usually occurring at the top of an uptrend.
To identify the Bearish Engulfing pattern, look for the following criteria:
- There should be a definite uptrend in progress.
- The first candle must be a white (bullish) candlestick.
- The second candlestick must be black (bearish).
- The black candlestick must completely cover the white candle (i” engulf” it). This means that the top of the black candle’s body must be above the top of the white candle’s body, and its bottom must be below the bottom of the white candle’s body.
The opposite pattern of the Bearish Engulfing pattern is the Bullish Engulfing pattern.
Before the Bearish Engulfing pattern occurs, the price must be in a definite uptrend.
The market gaps up but then selling pressure appears and forces the price to fall so hard, that the candle closes lower than the previous up (white or green) candle.
This second candle signals a shift in sentiment and a trend reversal is likely.
The pattern has greater reliability when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle.
The larger the second candle is compared to the first candle, the stronger the bears have become.
To analyze a specific Bearish Engulfing pattern, observe the following:
- If the preceding uptrend is significant, the pattern will likely be effective.
- The higher the top and the lower the bottom of the engulfing candlestick’s body, the more powerful the pattern is.