Bullish engulfing

Type:             Reversal

Relevance:    Bullish

Prior Trend:  Bearish

Reliability:    Medium

Confirmation:                     Suggested

No. of Sticks:                     2

Bullish Engulfing Pattern is a pattern characterized by a large white real body engulfing a preceding small black real body, which appears during a downtrend. The white body does not necessarily engulf the shadows of the black body but totally engulfs the body itself. The Bullish Engulfing Pattern is an important bottom reversal signal.

Recognition Criteria:

1. Market is characterized by downtrend.

2. Then we see a small black body.

3. Next day we see a white body that completely engulfs the black real body of the preceding day.

Explanation:

While the market sentiment is bearish; we see some subsided selling reflected by the short, black real body of the first day. Next day shows bull strength with a closing price at or above the previous day’s open. It means that the downtrend is now losing momentum and the bulls started to take the lead.

Important Factors:

The relative size of the bodies in the first and second days is important. If the first day of the Bullish Engulfing Pattern is characterized by a very small real body (it may even be a doji or nearly a doji) but the second day is characterized by a very long real body, this strongly indicates that the bearish power is diminishing and the disparity of white versus black body is indicative of the emerging bull power.

There is higher probability of a bullish reversal if there is heavy volume on the second real body or if the second day of the Bullish Engulfing Pattern engulfs more than one real body (which essentially means we see two or more small black bodies preceding the long white body).

The reversal of downtrend needs further confirmation on the third day. This confirmation may be in the form of a white candlestick, a large gap up or a higher close on the third day.