The Bearish Engulfing candlestick pattern is one of the clearest reversal signals in candlestick chart analysis and consists of two candlesticks. The first is a white up candlestick, followed by black down candlestick that together represent two trading periods within a rising market.
The formation’s appearance reveals a complete change in market sentiment, as the market gaps higher and continues higher after the opening, only to reverse direction and close at a lower level than the lows of the previous day.
The characteristics of this reversal pattern consists of a bullish first day, when the price of the stock or commodity continues trading higher and ends the day near the day’s high. On the following day, the market gaps higher and continues rallying until buying is exhausted and sellers begin appearing.
As higher prices attract more sellers, an avalanche of selling appears, which continues throughout the trading session, driving the market through the previous day’s low. The action forms a black candlestick that completely engulfs the previous day’s white candlestick body and would ideally but not necessarily include the wicks.
Traders generally trade the Bearish Engulfing pattern in one of three ways. The first method consists of shorting the market right before the close of the second day, when the black candle has been established — preferably on high volume — since prices will likely continue declining the next day.
The second method for trading the pattern consists of waiting until the third day, after the pattern has been formed, to short the market. This gives the trader some assurance that the previous day’s decline was not just an isolated event based on profit taking. The third way to use this indicator involves waiting for a confirmation of the reversal by using another indicator to confirm the move, such as noting a breakdown below a significant support level
Stocks that have demonstrated a Bearish Engulfing formation can be found listed below.
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