Courtesy of MarketTamer.com
We will spend the next several weeks analyzing Candlestick Patterns. Candlesticks can on the face of it, be somewhat intimidating. I think some of that is due to the names associated with the patterns and the seemingly endless number of patterns and how they should be applied. In actuality, the candlestick contains the exact data that a traditional bar contains (open, high, low and close).
It is the visual nature of the candle makes it far superior to the bar chart. Candles have been around for about 400 years and were first used in Japan by a family of legendary rice traders. Through the years, patterns or configurations of candlesticks have emerged that can allow a trader to predict with a high degree of probability the reversal of a stock. Candlesticks can be especially effective when used with western technical analysis. So today, we will begin with the “Bearish Engulfing Pattern”
- As with any candlestick pattern, you must read and interpret it in the context of the chart. What I mean by that is that if a reversal pattern appears, you must have a trend to reverse. If a pattern that is normally interpreted as a reversal pattern is found in the context of a sideways non-trending market, that pattern means little to nothing.
- The Bearish Engulfing Pattern should be found at the top of an uptrend.
- The candle begins by gapping up above the prior day’s close and then trading down so that the close is below the prior day’s candle.
- It is only necessary to engulf the prior day’s real body but is even more convincing if the engulfing pattern encloses the high and low of the prior session.
- There are times when the Bearish Engulfing Pattern will engulf several prior sessions which adds to the validity of the reversal.
- The engulfing is more convincing when it occurs on increased volume which reflects the investment communities’ participation and sentiment on the move.
- We always look for follow through on the move as evidenced by continuing bearish trading.
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