The Engulfing Pattern




The Engulfing Pattern is a major reversal signal with two opposite color real bodies composing this pattern.



There are 4 major criteria for engulfing candlestick formations:

  • the stock must be in a definite trend, up or down
  • two candlesticks make the engulfing-pattern. The second real body MUST wrap around, or engulf the prior real body. It need NOT engulf the shadows.
  • the second real body should be the opposite color of the first real body.
  • heavy volume on the second real body

Also, a prime use of the engulfing-patterns is utilizing them as support and resistance.




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Bullish Engulfing-Pattern



Bullish Engulfing Pattern


Identification:

  • the first day is a long black candle
  • the second day is a white candle that completely engulfs the real body of the first day



What it signals:

Occurring in a downtrend, the Engulfing depicts an opening at a new low, followed by a high buy-in that closes at or above the previous day’s open. This signifies that the downtrend has lost momentum and the bulls may be gaining strength.

The Engulfing indicator is also the first two days of the Three Outside Up pattern.

Three Outside Up



This pattern is a more reliable addition to the standard engulfing-pattern. The third day is confirmation of the bullish trend reversal.




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Bearish Engulfing Pattern



Bearish Engulfing Pattern


Identification:

  • the first day is a long white candle
  • the second day is a black candle that completely engulfs the real body of the first day



What it signals:

Occurring in an uptrend, the Engulfing pattern depicts an opening at a new high, followed by a high volume sell-off that closes at or below the previous day’s open. This signifies that the uptrend has been hurt and the bears may be gaining strength.

The Engulfing indicator is also the first two days of the Three Outside Down pattern.

Three Outside Down



This pattern is a more reliable addition to the standard engulfing-pattern. The third day is confirmation of the bearish trend reversal.


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Conclusion

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The Engulfing-formation is comparable to the Western stock chart pattern named the Outside Day.

As with all candlestick charts and patterns, this should be used with other technical analysis tools to further confirm its effectiveness.


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