The ‘Bearish Engulfing’ pattern is a two candle reversal setup marked by a small candlestick that is followed by a big black candlestick that engulfs it. It is a medium credibility setup that often leads to the much more significant ‘Three Outside Down’ pattern, i.e. confirmed bearish engulfing. This often appears inside a congestion at which point they would be best ignored.
Technical Description
1) Preceded by a bullish market the first candlestick in the pattern should be white, ideally small though not necessarily.
2) The body of the second candlestick is black and should fully engulf the preceding white candle.
3) Ideally the wick and tail should also be engulfed though this is not necessary.
Mark’s Perspective
Engulfing patterns are among the most common to occur in candlestick charting and highly sought after. Already considered as a medium reliability setup its effectiveness can further be enhance according to its actual shape and the context to which they appeared. If preceded by rapid a increase in prices with big white candles before the pattern occurs, or in cases where the first candle in the pattern is a small white candle, aggressive shorts may be taken.
Should the preceding up trend be slow or have seen limited gains before the engulfing pattern occurs a confirming bearish gap following the patterns appearance or a black candle with a lower close would be necessary. The necessity of a confirming candle also applies if the first white candlestick is near in size to the engulfing black candles’ body.
Whatever the form stops must be place above the engulfing candlestick’s high.