The Bearish Engulfing Pattern

The bearish engulfing pattern is a chart pattern that 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.

As implied by its name, a bearish engulfing pattern may provide an indication of a future bearish trend. This type of pattern usually accompanies an uptrend in a security, possibly signaling a peak or slowdown in its advancement.

Relative sizes of the first and second days are important. If the first day of the bearish engulfing pattern is a very small real body (it may even be almost a doji or is a doji) but the second day has a very long real body, this shows the dissipation of the prior uptrend's force and an increase in bearish force.

A protracted or very fast move increases the chance that potential buyers are already long and that there may be less of a supply of new longs in order to keep the market moving up. A fast move makes the market overextended and vulnerable to profit taking. A bearish engulfing pattern appearing after such a move is more likely to be an important bearish reversal indicator.

A bearish reversal is more possible if there is heavy volume on the second real body or if the second day of the bearish engulfing pattern engulfs more than one real body.

A confirmation in the third day is required to be sure that the uptrend has reversed. The confirmation may be in the form of a black candlestick, a large gap down or a lower close on the third day.