The Bullish Engulfing Pattern:

The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occurs at the bottom of a downtrend. The pattern consists  of two Candlesticks:

• Larger Bullish Candle (Day 2)

The bearish candle real body of Day 1 is usually contained within the real body of the bullish candle of Day 2.

• Smaller Bearish Candle (Day 1)

On Day 2, the market gaps down; however, the bears do not get very far before bulls take over and push prices higher, filling in the gap down from the morning's open and pushing prices past the the previous day's open.

The interpretive power of the Bullish Engulfing Pattern comes from the incredible change of sentiment from a bearish gap down in the morning, to a large bullish real body candle that closes at the highs of the day. Bears have overstayed their welcome and bulls have taken control of the market.

The chart below of the S&P 500 Depository Receipts Exchange Traded Fund (SPY) shows an example of a Bullish Engulfing Pattern occuring at the end of a downtrend:

 Bullish Engulfing Potential Buy Signal

There are three main times when a trader might buy using the Bullish Engulfing Pattern; the buy signals that are presented below are ordered from the most aggressive to most conservative:

1. A trader might buy at the close of Day 2 when prices rallied upwards from the gap down in the morning. Traders could interpret that the rally on Day 2 was significant and truly a reversal of market sentiment, if there was a substantial increase in volume that accompanied the large move upward in price (see: Volume).

1. Secondly a trader might buy on the day after the Bullish Engulfing Pattern occurs; by waiting until the next day to buy, a trader is attempting to confirm that the bullish reversal and enthusiasm of the prior day is continuing and was not just a one day occurance like a short covering rally. In the chart above of the SPY's, a trader might not enter the market long on the day after the Bullish Engulfing Pattern because the market gapped down significantly and even made new lows. A trader using methodology #2, would likely wait for a different potential buy signal such as the one presented in method #3 next.

1. Thirdly, a trader might wait after the bullish engulfing pattern for another signal, mainly a price break above the downward resistance line (see: Support & Resistance), before entering a buy order.

(Source: onlinetradingconcepts.com)

The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. FICA Academy shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site.