Sunday, June 1, 2014

Candlesticks: Bullish Engulfing

The bullish engulfing signal may happen often as it is a major reversal pattern. It is comprised of two opposite colored bodies and it is formed after a downtrend. It opens lower than the previous day’s close and closes higher than the previous day’s open. Thus, the green candle completely engulfs the previous day’s red candle.

Criteria for bullish engulfing signal

  • The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.
  • Prices have been in a definable down trend even if it has been short term.
  • The body of the second candle is opposite color of the first candle, with the first candle the color of the previous trend. The exception to this rule is when the engulfed body is a doji or an extremely small body.

Signal Enhancements for bullish engulfing signal

  • A large body engulfing a small body.
  • The previous day shows the trend was running out of steam. The large body shows that the new direction has started with good force.
  • When the engulfing pattern occurs after a fast move down, there will be less supply of stock to slow down the reversal move. A fast move makes a stock price over extended and increases the potential for profit taking.
  • Large volume on the engulfing day increases the chances that a blow-off day has occurred.
  • The engulfing body engulfs the body and the shadows of the previous day. The reversal has a greater probability of working.
  • The greater the open gaps down from the previous close the greater the probability of a strong reversal.

Pattern Psychology
After a downtrend has been in effect the price opens lower than where it closed the previous day. Before the end of the day, the buyers have taken over and moved the price above where it opened the day before. The emotional psychology of the trend has now been altered.

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