Definition
Bearish Engulfing includes a long black candle which covers the body of the previous day’s short white candle (shadows aren’t necessarily covered). Bearish Engulfing forecasts bearish trend reversals with medium reliability.
- Trend: Reversal
- Expected trend: Bearish
- Previous trend: Bullish
- Reliability: High
- Type: Bearish
- Number: 2
Recognition
- The market is in an upward trend.
- There is a white short candle with a gap in the previous trend’s direction.
- The secound day is a long black candle which covers the body of the previous day’s white candle.
Interpretation
This formation is typical at the end of an ascending trend. It is important that on the second day, the black candle covers the previous day’s white candle’s body. Usually it signals a reversal in short term.
Important factors
The two candles’ relative body size is incredibly important. If the first day is a very short candle (could be even a Doji), and the second day is very long, it may signal the exhaustion of the trend. The potential buyers have already opened the long positions due to the quick price changes. This fastens the profit realisation. Bearish reversal formations have higher reliability if the trading volume on the second day is high and if the black candle in the Bearish Engulfing formation covers the body of more previous candles. To make sure the trend is continued, a confirmation on the third day is needed. The confirmation could come from a black candle with a downward gap or a lower closing price.
