The bearish engulfing candlestick pattern is a crucial one to recognize and understand because it is one of the most direct signals of a top reversal. This pattern begins during a bullish market. The first day looks like a continuation of this uptrend, with a small to medium sized white candle. The second day seems to confirm this, at least at its opening, because it begins with a healthy gap up. However, everything goes south from there. The second day has a long black candlestick either with or without wicks, caused by a long fall from that high opening. The black body stretches both higher and lower than the first day’s white one, which is the basis for calling it an engulfing candlestick.
While the first day’s white candle seems like a bullish indication, its short size is indicative of the uptrend weakening. The long black candle only confirms this. This may mean that the market has reach its peak and is ready to turn. Sellers are setting the tone, and if they continue to do so the price is at the beginning of a long fall. At the very least, it’s safe to say that the upturn is losing momentum. The longer the black candle on the second day, the more likely you are to see a downturn in the immediate future. If the black candle closes far below the white body, it is even better for the bears.
Your Next Move
The Bearish Engulfing Candlestick Pattern is a moderate indicator, but it’s wise to wait before acting, especially if the second candle isn’t especially long or if it ends just below the first day’s body. Most investors wait until the next day before acting on this pattern.
Confirmation
To be certain that the bears are winning, look for signs on the third trading day. These can include a black candlestick, an even lower closing point on the third day, or a gap down.
Variations
There are several variations that affect the relevance of the bearish engulfing candlestick. The first variation you might see is a variation in the relative size of the candlesticks from the two days. Generally, the larger the black candlestick is in relation to the white candlestick, the more meaningful the downtrend prediction. Sometimes the first day’s candlestick is a doji, which shows that the market poised to turn. Another variation is the type of market in which the bearish engulfing candlestick occurs. If this pattern appears after a long uptrend, it is more likely to be due for a reversal. If the price does turn after the bearish engulfing candlestick, it may mean that this highest level is the upper ceiling for that market.
The bearish engulfing candlestick pattern may not be definite, but it is a solid indicator that the bears are beginning to gather steam. Even if the market doesn’t turn immediately, it likely is moving toward a downturn in the near future. Knowing this will allow you to make wise decisions that maximize your profit.
Source : candlestickanalysis.com
