The ‘Bullish Engulfing’ pattern is a two candlestick reversal setup marked by a small candlestick and followed by a big white candlestick that engulfs the preceding candle. It is considered to be a medium credibility setup that often leads to the much more significant ‘Three Outside Up’ pattern, i.e. confirmed bullish engulfing. Engulfing patterns are very common inside a congestion and should be passed over under such circumstances.
Technical Description
1) Preceded by a bear market the first candlestick in the pattern should be black, ideally small though not necessarily.
2) The body of the second candlestick is white and should fully engulf the preceding candlestick.
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 are highly sought after. Already a medium reliability setup its effectiveness is further enhanced by its actual shape and the context to which they appear. If preceded by a rapid drop in prices with big black candles before the pattern occurs, or in cases where the first candle in the pattern is a very small black candle, aggressive buys may be taken.
Should the preceding down trend be slow or if it has seen limited sell-off before the engulfing pattern occurs a confirming upside gap following the patterns appearance or a white candlestick with a higher close would be necessary. The necessity of a confirming candle also applies if the first black candlestick is near in size to the engulfing white candles’ body.
Whatever the form, stops must be place below the engulfing candlestick’s lows.