Bullish Engulfing

Bullish Engulfing is a major uptrend reverting chart composed of two candlesticks. It occurs after a significant downtrend.

It is significant on all time units.

The elements that define bullish engulfing are as following:

• Bullish engulfing must occur after a significant downtrend.

• The second candlestick must be engulfed by the first candlestick (although it does not necessarily have to swallow its wicks).

• The first candlestick must be red (there is an exception that will be explained further below) and the engulfing candle must be green.

• The wicks or tails of the second candle should preferably be small.

Such a structure occurs after a downtrend following a day of losses, quotations open below closing prices but as the downtrend dies down the quotatations reverse and close above yesterday’s opening price. Yesterday’s losses are thus completely erased. This demonstrates that an upward trend is on its way.

Ideally, the wick of the second candlestick should be small as this demonstrates that the “bulls” have taken the upper hand and that the “bears” can no longer drag prices down. In this example, the following day’s opening occurs with a bull gap, this confirms the strength of the new upward trend.

It is important to note that the body of the first Japanese candlestick is generally red; however a very small green body or doji may also be convenient for this structure.

The larger the second candlestick is compared to the first one, the more significant the structure will be. Moreover, if the body of the second candle engulfs the bodies of several candlesticks, the signal is even stronger. This is the case in the above examples, where the body of the candlestick engulfs the following three bodies of Japanese candlesticks. High levels of volume will further confirm this as well.

No matter how good the quality of the engulfment is, it is still worth waiting that the following candlestick confirms this by opening higher, if the goal is to buy on day+1 (“day” being the day of the second candlestick in the engulfing structure) or be green if we would rather wait until the next closing day and buy on the opening of day+2.

The threshold for invalidation may be placed either under the days low formed by the pattern, or by the method of the third depending on the investors’ investment horizon.

Otherwise it can be interesting to combine observations of reversal charts with support and resistance lines. A bullish engulfing can therefore occur at a support line, as it is the case in the above example at the 2600 point mark.