What are Bearish Engulfing Candlestick Pattern ?
Bearish Engulfing Pattern is a reversal candlestick pattern which is bearish in nature and appears at the end of an up trend. It is a complex pattern made of two candlelines. The first candle is bullish in nature and the second is bearish in nature.
It has its name because the real body of the second candle engulfs the real body of the first candlestick. It is one of the important pattern, which you should give attention to.
Bearish Engulfing Pattern is formed by the combination of two candlesticks. The first one is a rising white candle and the second is the reversal black candlestick.
The market is in an up trend. The price opens at almost low of the day and as usual the buyers continue to buy. At the end of the session the price closes almost at the top for the time period. This results in the formation of bullish white candle, which is the first candle of the Bearish Engulfing Pattern.
On the next day or next time period the price opens above the high of the real body of the previous bearish candlestick. Buyers are making new long trades. Those who are already long in the market are also adding to their position. But the smart money creeps in and starts unloading their position to these ignorant buyers. As the supply increases the momentum decreases and the prices starts falling. As the prices fall the bulls are happy to buy more at a lower price. This facilitates bears to distribute more shares at higher price.
The supply continues to increase more than the demand, pushing the price down. As the new buyers are all in loss, they also start to sell their position to minimize their losses. Sensing the change in the trend, the old bulls starts booking profits in their long positions. As the bears continue to increase their short position, the price falls further and at the end of the session the price closes below the real body of the previous candle. This results in the formation of bearish black candle, which is the second candle of the Bearish Engulfing Pattern and it engulfs the real body of the previous candlestick.
Bearish Engulfing Pattern is a major bearish reversal candlestick pattern. They occur at the top of an up trend.
Study the chart given below.
It is obvious that the sellers are taking over the control of the market. It signifies that the top reversal of the up trend is unveiling.
It is a more powerful signal than Dark Cloud Cover Pattern because the action of bears is more evident in Bearish Engulfing Pattern than in Dark Cloud Cover Candlestick Pattern.
The significance of this Bearish Engulfing Pattern increases if the second day's opening is above a resistance area and the close is below the resistance area. If the second candle is a black marubozu or with a shaven head or shaven bottom, it speaks of the more bearishness of the market. Its importance is even more if it is accompanied by increased volume.
If you are holding a long position, Bearish Engulfing Pattern should alert you to take action the next day. One can cover her long position below the low of the second day's black candle.
A short trade can be entered below the low of the second day's black candle. Place a buy on stop order above the high of the pattern to limit your loss, in case the up trend continues to go up.
Sometime first day's real body can be black, if it is a very small body. First day can also be a doji.
Bearish Engulfing Candlestick Pattern may occur along an up trend without a reversal. It only exhibits a minor profit booking by bulls.
Counter part of this pattern in a candle chart is Bullish Engulfing Candlestick Pattern.
There are many more complex candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed below to learn and understand more about them.