What is a Bearish Engulfing Pattern
A bearish engulfing pattern is a technical chart pattern that may portend a future bearish trend. The pattern consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or "engulfs" the small white one.
BREAKING DOWN Bearish Engulfing Pattern
A bearish engulfing pattern usually accompanies an uptrend in a security, possibly signaling a peak or slowdown in its advancement. However, whenever a trader analyzes any candlestick pattern, it is important for them to consider the prices of the days that precede and follow the pattern's formation before making any decisions.
A bearish engulfing pattern is seen as the end of an upward trend, marked by the primary candle of upward momentum being overtaken, or engulfed, by a larger secondary candle indicating a shift toward a downtrend. This is particularly relevant when the secondary opening price is higher than the primary price. Also, the further down the secondary candle goes, beyond the lower edge of the primary candle, the greater the downward trend indicator.
Investors use this information in hopes of anticipating a change in market conditions. If a bearish engulfing pattern is present, an investor focused on short-term gains may choose to sell the particular security if they believe prices will continue to fall, allowing them to move their investments toward a security showing growth potential. Long-term investors may not choose to sell the security, as a bearish engulfing pattern is not a guarantee of a long-term downward trend.
Using Candlestick Charts to Analyze Bearish Engulfing Pattern
People frequently use candlestick charts in technical analysis, a strategy based on the study of trading activity such as price movement and volume. A candlestick has three points: the open, the close and the wick. The open and close points represent the opening and closing prices, respectively, of a particular security. If the open point is below the close point, this notes an upward trend, often shown in white or blue when charted. If the open point is higher than the close, this indicates a downward trend, often shown in black or red when charted. The wicks represent the most extreme price, one for the high and one for the low, paid for a security during the period in question.
Bullish Engulfing Pattern
The obverse of a bearish engulfing pattern is a bullish engulfing pattern, which shows an upward trend overtaking a previous downward trend within a candlestick chart. This may indicate a market shift is occurring, and an upward trend is on the horizon.