A Bearish Engulfing candle is a bearish two-period reversal pattern. It can often be a very powerful reversal signal. The Bearish Engulfing can indicate exhaustion in buying pressure after a phase of positive price action. It is a candle that signals the beginning of a new trend of lower prices. The candle is most effective when it is seen at the end of an uptrend.
The Bearish Engulfing candle starts with the OPEN price above the previous CLOSE (this would be a gap higher). The price might then move briefly higher before a bull failure. The OPEN is at (or around) the session HIGH, with the HIGH ideally also the highest price of the uptrend. This rejection of the new high then results in the price falling throughout the session.
The candle finishes with the CLOSE price of the below the OPEN of the previous candle. The whole of the previous session’s candlestick body is said to have been ”engulfed”. N.B. Although the Bearish Engulfing is just one candlestick, it is measured off the previous candle, so is strictly speaking a two-period candlestick set-up.
| BEARISH ENGULFING | |
| Price action | The OPEN of the Bearish Engulfing is above the CLOSE of the previous candle. Following a strong intraday decline, the CLOSE of the Bearish Engulfing is below the OPEN of the previous candle. |
| Time horizon | Bearish Engulfing can be effective across all time scales from 5-minute charts up to hourly, daily and weekly. The longer term the horizon, the higher the conviction in the move. |
| Psychology | The buying pressure of the uptrend has become exhausted as the market rejects an opening gap higher. The rejection results in a sharp intraday reversal as the market starts to decline. A CLOSE below the OPEN of the previous candle can sling-shot the market lower into a new bearish phase. |
| Confirmation | The price continues to move lower during the next candlestick to close with another negative candlestick. |
| High Conviction | The larger the previous session that has been engulfed, the higher the conviction, suggesting selling exhaustion has been reached.Also coming at the end of a long trend of higher prices suggests that a decisive shift in outlook has taken hold.Very small candlestick shadows on the Bearish Engulfing suggest a decisive bearish move throughout the session and increases conviction. |
| Lower Conviction | A Bearish Engulfing appearing after a choppy phase or during sideways trading range significantly reduces conviction in the pattern.A close higher in the session after the Bearish Engulfing decreases conviction. |
| Aborting the pattern | A rebound in price back above the HIGH of the Bearish Engulfing candle would abort the pattern. |
| Potential Stop-Loss | Stop-losses can be placed above the HIGH of the Bearish Engulfing candlestick. |
