Bearish engulfing candlestick patterns that signal a decline in a stock's price is quite possible. The pattern is fairly simple and quite common, which also means it is susceptible to providing false signals. Yet, the appearance of the pattern in these stocks shows that there was strong selling on Tuesday, November 6, and therefore should not be ignored. Also, since the major indexes moved higher on November 6 (S&P 500 up 0.79%), the fact that these stocks created a bearish pattern on such a day implies weakness. The pattern is created by an "up" day followed by a "down" day; the down day's open is higher (or the same) than the prior close, and the down-close is lower than the prior closing price. In essence, the larger down bar "engulfs" the up day, showing selling power overtook buying pressure.

SEE: The Basic Language Of Candlestick Charting

NextEra Energy (NYSE:NEE) created a bearish engulfing pattern after a large down candle on November 6, engulfing the prior real body - the fat part of the candle is representing the difference between the open and close - which was quite small. While the large red candle shows the current selling pressure, the most significant technical price area is just below $69, which represents support. If the price falls below that level, another wave lower is likely. Engulfing patterns don't provide a profit target, yet a breach of $69 has an initial target of $67 followed by $64. The stock has been fairly strong throughout the year, so a rise back above $70.30 nullifies the bearish signal.

NextEra Energy bearish pattern

Crocs (Nasdaq:CROX) has already had a tough year closing at $12.63 on November 6, which is about 44% below the $22.59 high seen in April. After a brief rally the first few days of November, the engulfing pattern shows there is still selling to be done. The recent low is $12.44, and is the lowest level since September 2009. There is little support until $10, which is the initial target if the price falls through the recent low. If the downtrend continues the long-term target is $6. A rally above $14 may spark some buying and nullify the bearish pattern, but the overall trend remains down as long as the stock below $17 ( long-term trendline).

SEE: Technical Analysis: Support And Resistance

crocs bearish

Community Health Systems (NYSE:CYH) has marched higher throughout the year, but is encountering resistance at $30. The stock was unable to hold the level in October, and the engulfing pattern on November 6 near that level again shows buyers may be out of steam. The bearish engulfing pattern signals a decline toward support just above $26. If $26 is broken the target is $22.50. A rise above $30.05 nullifies the bearish pattern and signals the uptrend, which has been in place throughout 2012 is still in play.

SEE:Interpreting Support And Resistance Zones

Community Health System bearish engulfing pattern

Sysco Corporation (NYSE:SYY) created a 52-week high at $31.90 in October, but on the most recent rally in November the stock only managed a high of $31.78 before declining. The lower high and engulfing pattern on November 6 signal potential trouble for the stock. Support is just above $30, and if penetrated the target is $28.30. On the bullish side, there is an upward sloping trendline intersecting near $30.50. If that trendline fends off further declines, it represents a buying opportunity as the stock will likely once again challenge the $31.90 area.

Sysco bearish

The Bottom Line
Bearish engulfing patterns show that sellers are present, and momentum has shifted to the downside compared to the prior day. The pattern is fairly common though, so it is best to combine with other chart patterns and view it in the context of current trends. The other forms of analysis will also aid in establishing profits targets, since engulfing patterns don't provide one. During an uptrend a bearish engulfing pattern alerts you to the possibility of a coming decline, while in a downtrend warns that the selling is continuing. False signals do occur though, so always manage risk.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.

Related Articles
  1. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  6. Charts & Patterns

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  7. Trading Strategies

    4 Common Active Trading Strategies

    Active trading entails buying and selling securities with the intent of profiting from short-term price movements.
  8. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  9. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  10. Term

    Swing Trading Risks and Rewards

    Swing trading is the attempt to capture gains in a stock within one to four days.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center