The Bullish Engulfing Candlestick Pattern is a bullish
reversal pattern, usually occurring at the bottom of a downtrend. The pattern
consists of two Candlesticks:
- Smaller Bearish
Candle (Day 1)
- 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.
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 previous days open.
The 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
occurring at the end of a downtrend:
Buy Signal
There are three main times to buy using the Bullish Engulfing
Pattern; the buy signals that are presented below are ordered from the most
aggressive to most conservative:
- Buy at the close
of Day 2 when prices rallied upwards from the gap down in the morning. A
strong indication that the rally on Day 2 was significant and truly a
reversal of market sentiment, is if there was a substantial increase
in volume that accompanied the large move upward in
price.
- Buy on the day
after the Bullish Engulfing Pattern occurs; by waiting until the next day
to buy, a trader is making sure that the bullish reversal and enthusiasm
of the prior day is continuing and was not just a one day occurrence like
a short covering rally. In the chart above of the SPY's, a trader would likely
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 more concrete buy
signals such as the one presented in method #3 next.
- After a trader
sees the Bullish Engulfing Pattern, the trader would wait for another
signal, mainly a price break above the downward resistance line before
entering a buy order.
Intra-day Bullish Engulfing Pattern
The following 15-minute chart of the S&P 500 exchange
traded fund (SPY) of the 2-day period comprises the Bullish Engulfing Pattern
example on the prior page:
- Day 1: As is seen in
the chart above, Day 1 was a down day, even closing the day at the low
(bearish sentiment).
- Day 2: The open was a
gap down, very bearish sign; but the bulls appeared to have had enough
because the price of the SPY's went up the rest of the day, closing near
the day's highs (bullish sentiment) and higher than Day 1's high.
- Day 1: As is seen in
the chart above, Day 1 was a down day, even closing the day at the low
(bearish sentiment).
