by What is it?
It is the first of multiple candle line patterns and is a major reversal signal with two opposite color real bodies composing this pattern.
Bullish/Bearish Engulfing Pattern
- Clearly definable uptrend (bearish engulfing pattern) or a clearly definable downtrend (bullish engulfing pattern), even if the trend is short
- Two candles comprise of the engulfing pattern, where the second real body must engulf the prior real body (need not engulf the shadows)
- Second real body of the engulfing pattern should be the opposite color of the first real body.
- Exception is that doji engulfed by a large white body could be a bottom reversal (in downtrend)
- Doji engulfed by a large black body could be a top reversal (in uptrend)
Factors to improve likelihood of engulfing pattern
- First day has a very small body and second day has a very long body
Reflects a dissipation of the prior’s trend force and the large second real body proves an increase in force behind the new move
- Appears after a protracted or very fast move
Creates an overextended market (overbought/oversold)
- Heavy volume on the second real body of engulfing pattern
Uses of Engulfing Patterns
#1 Can be used as a support/resistance
- Use the high of a bearish engulfing pattern as resistance
- Use the low of the bullish engulfing pattern as support
(This is especially useful if the market has moved too far from the lows [bullish engulfing pattern] or highs [bearish engulfing pattern])
#2 Point of entry
As we need to wait for the close of the second session to determine the engulfing pattern, we should wait for a possible correction to the support/resistance for bullish/bearish engulfing pattern to enter a long/short position
