Candlesticks

BEARISH ENGULFING PATTERNS

Candlesticks E-Book

Bearish engulfing patterns are two candlestick patterns found on stock charts. The bearish engulfing pattern signals the possible end of a bullish trend. Confirmation is needed for this pattern to set up and break.

Buyers and sellers are in a constant battle with each other for control. The fight is what forms stock charts. Candlesticks by themselves, whether long legged doji candlesticks or high wave candlesticks, tell a story.

When you group the different candlestick together they form key areas of support and resistance as well as patterns. These patterns and levels are tools that traders pay close attention to and use to their advantage.

BEARISH ENGULFING PATTERNS

Bearish engulfing patterns are made up of two candlesticks. The first candle is a small bullish candlestick with small wicks. The second candlestick is a bearish one that engulfs the small bullish one.

The name of the pattern implies the what the future may bring. A bearish trend engulfing the previous bullish one to reverse it.

This pattern typically occurs at the top of a bullish trend. You can read this signal as a peak or a slowing down in it’s moves up. It’s good to consider the prices of the stock that occurred before the bearish engulfing candle as well as after it.

Bullish momentum is coming to an end when bearish engulfing candles form. This is especially relevant when second candles price opens higher than the first candles price.  The more the second candle falls down, should be lower than the first candle, the more significant the downtrend signal is.

Bearish Engulfing Patterns

BEARISH ENGULFING PATTERNS – TREND REVERSAL

When bearish engulfing patterns occur at the top of an uptrend it’s one of the most important factors of a reversal. Bearish engulfing candles can happen anywhere on a chart but the most powerful reversal signal is when it forms at the top.

The pattern has formed at a key resistance level that the bulls can’t break. The bears don’t want price to climb anymore so they step in. The highs of the bearish engulfing candle should be the highs of the pattern.

The next candle after the bearish engulfing pattern close lower than it’s predecessors. That’s a pretty significant signal that the trend reversal is taking place. It should start making lower lows.

It’s important to remember that small candlestick patterns like this one can break down all the time. It’s important to see what technical analysis is telling you. These indicators can help to solidify a reversal or make you aware of a trap.

BEARISH ENGULFING PATTERNS – TECHNICAL ANALYSIS CONFIRMATION

Technical analysis when paired with candlesticks become a fantastic tool in helping to predict moves. Candlesticks form key levels of support and resistance as well as tell stories and form patterns.

When you couple that with moving average lines, RSI and MACD, you have tools to help you trade. These indicators are not a crystal ball to help you see into the future. If that were the case, everyone would be rich.

They do provide confirmation or hints of coming moves though. If RSI is overextended and a bearish engulfing candle forms, you know a reversal is probably going to happen. The degree of the reversal isn’t known yet.

Price could go down only one day before going back up. In contrast, price may end up completely reversing and fall. Look at where price is in regards to moving average lines. All of these play a role in how a stock will trade.

Read our posts on the simple moving average formula and VWAP trading strategy to learn more above trading with moving average lines.

Bearish Engulfing Patterns
You can see 2 bearish engulfing patterns on the chart for MMM. Price was in an uptrend and gapped up on the first one. Read our post on gap up patterns to learn more about them. RSI was overbought and price was trading above the moving average lines signaling a reversal was imminent. A bearish engulfing candle formed and price came down although not drastically. The second bearish engulfing pattern formed but didn’t reverse drastically.

BEARISH ENGULFING PATTERNS – WHAT OTHER PATTERNS ARE THERE?

Stock charts are made up of big and small patterns. Sometimes a reversal pattern such as bearish engulfing patterns set up and break down. That can be because of the larger pattern forming.

It’s incredibly important to be able to zoom out and see the big overall patterns like symmetrical triangle patterns or bull pennants.

If a small bearish pattern forms inside of a large bullish pattern, it can go either way. Being able to see the larger patterns can keep you from buying or selling at the wrong time.

bearish engulfing patterns

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