Candlesticks – Bullish Engulfing
A popular candlestick pattern used by technical analysts consists of the Bullish Engulfing pattern, which provides some of the clearest reversal signals in candlestick chart analysis. The Bullish Engulfing pattern is made up of two candlesticks representing two periods of trading activity; the first is a black down candle, and the second is a white up candle.
In this particular reversal pattern, the first day has heavy selling, with the stock or commodity dropping substantially and closing near the lows of the day. On the next day, heavy selling dominates the market on the opening, driving the market down to an oversold condition.
The low price attracts buying interest, bringing a wave of buying into the market. The buying, which continues throughout the session, drives the price past the previous day’s high and forms a white candlestick that completely engulfs the previous day’s black candlestick body and would also, but not necessarily include the wicks. The formation reveals a complete change in market sentiment, as the market gaps lower and continues lower after the opening, only to reverse direction and close at a higher level than the highs of the previous day.
Traders generally use the Bullish Engulfing pattern in one of three ways. The first method consists of buying right before the close of the second day, when the white candle has been established — preferably on high volume — since prices will likely continue higher the next day.
The second method for trading the pattern consists of waiting until the next day to buy, which would give the trader some assurance that the rally was not just an isolated event or a short covering rally. The third way involves waiting for a confirmation of the reversal by using another indicator such as the Relative Strength Index or a break above resistance to confirm the move.
Stocks that have demonstrated a Bullish Engulfing formation can be found listed below.
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