Bearish Engulfing

The bearish engulfing is a main figure of the bearish reversal, made up with two Japanese candlesticks, which happens after a bullish tendency.
It is significant on all time units.

It is qualified by the following elements:

• The bearish engulfing has to appear after a bullish tendency.

• The body of the second candlestick must engulf the first one (and not necessarily engulf the shadows).

• The 1st candlestick must be green (with the occasional exception, see after), and the one which engulfs must be red.

• The 2nd candlestick shadows are preferably short.

Such a structure appears when following a bullish tendency, after an overhang day, quotations has a bullish opening in comparison with the day-before closing but the bullish forces peter out and quotations decrease to close below the day-before opening.

So the day-before gains are totally write off. That shows that a bearish force is appearing. The low shadow of the second Japanese candlestick must ideally be short as it shows that bear speculators reach the control and that bull speculators didn’t succeed any more in rising quotations.

We have to notice that the 1st candlestick body is generally green but that a very small red body or a doji can also suit this structure.

The bigger the 2nd Japanese candlestick body will be in comparison with the first one, the more significant the structure will be; if the 2nd candlestick body engulfs several candlesticks bodies, the signal would be even better. Besides, it is the case in the example before-mentioned where the candlestick body engulfs the two previous candlesticks bodies. Important volumes can also confirm the figure.

Whatever the quality of the engulfing, it would be better to wait for the confirmation of the figure by the following candlestick, which has to have a bullish opening if we want to sell at D+1 (D is the day of the 2nd candlestick of the engulfing structure). Or has to be red if we prefer to wait for the next closing and sell at the opening at D+2.

The invalidation threshold can be put either above the upper candlestick of the structure, or according to thirds method according to the stakeholder invest prospects.

Moreover, it is relevant to combine the observation of the reversal figures with support and resistance lines. Sometimes a bearish engulfing can appear at a resistance level.