A bullish engulfing candlestick pattern can be a very good indicator for finding turning points in a stock. The pattern occurs when an up-candle (close above open) completely envelopes the prior down-candle (close below open). This pattern occurs in the following four stock charts. While many people will look for this candlestick pattern to try to find reversals in downtrends, the pattern can be very useful when it occurs in the same direction as the current trend. The following four stocks are all in uptrends and have seen recent pullbacks. The appearance of a bullish engulfing pattern in such an environment shows the bulls are still alive, and the stocks could be due for another wave higher.
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Philip Morris (NYSE:PM) was a great long in 2011 and remains in an uptrend. So far in 2012, though, the stock has been retreating. On January 13 a bullish engulfing pattern occurred; the price jumped from an open of $76.22 to close out the day at $77.32. This bullish day dwarfed the prior day's intra-range where the stock finished down marginally. The move shows the bulls are still alive and another wave in the uptrend could occur. Targets for the next wave are $82.50 and $85. Stops can be placed a little bit below $76, which provides an attractive risk/reward ratio. (From picking the right type of stock to setting stop-losses, learn how to trade wisely. For more, see Day Trading Strategies For Beginners.)
Dollar General (NYSE:DG) is another stock that had a great 2011, but started out 2012 by pulling back (not much though). With the stock still in an uptrend, the buyers stepped back in on Friday, creating a bullish engulfing pattern. Since last November the stock has been moving in a more choppy fashion, which means there is resistance and support close at hand. If the engulfing pattern does in fact indicate the stock is going higher, it will need to break through the recent high at $42.10. If it does, the target is $45 to $46. Ideally, volume should increase as the stock moves higher. Support is presently just above $38 and can be used as a stop level. A tighter stop, which has a higher chance of being triggered but reduces the risk, can be placed just below $39.50. (For related reading, see Interpreting Support And Resistance Zones.)
Nisource (NYSE:NI) was having a hard time breaking above $23 in the last half of 2011, but in December managed to climb to $24. As the New Year kicked off, the stock fell and has been falling since ... that is until the bulls stepped in in force on Friday, pushing the stock up 2.8%. The progressively higher lows since August 2011 indicate there is underlying strength, and the strong showing on Friday means the stock could hit a new 52-week high fairly soon. If a wave higher occurs, the target is $25 to $25.50. Stops can be placed near $22, with primary support just above $21. (Understanding this key concept can drastically improve your short-term investing strategy. For more, see Support & Resistance Basics.)
Sunoco Logistics Partners (NYSE:SXL) has been on a tear since last October, and the uptrend may not be finished yet. Since the start of this year, the stock has been pulling back, but the recent bullish engulfing pattern means the correction could be over. There is a support band between $36 and $34, so this is a likely spot for the bulls to step back in. If the stock breaks the 52-week high at $39.98 the first target is $42 followed by $44. Stops can be placed just above $33 (primary support) or near $35, which is below the engulfing pattern. (For more on stops, see Maximize Profits With Volatility Stops.)
The Bottom Line
A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend. All these stocks are in uptrends but have seen recent pullbacks, and the candlestick pattern indicates the correction could be over. The pattern shows that bulls are present and willing to buy, and the uptrend lends reliability to the signal. As with any pattern, this is not always reliable, so stop losses should be used. (For more on candlesticks, see Candlestick Charting: What Is It?)
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At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.