Essentially the opposite of the Bullish Engulfing Pattern, the Bearish Engulfing Signal indicates it is time to sell or go short. This signal shows an extremely high probability that the buying spree is over.
The Bearish Engulfing pattern contains two opposite colored bodies and indicates a major reversal pattern. As you can see, the previous trend was upward.
The Bearish Engulfing Pattern opens higher than the previous day’s close, but closes lower than the previous day’s open. Notice how the Bearish Engulfing Signal completely “engulfs” the previous day’s body.
Bearish Engulfing Rules:
The body of the second day completely engulfs the body of the first day. Ignore the wicks/shadows.
Previous bars have been in a definitive uptrend, even if short term.
The first candle in this pattern is the same color as the previous trend (with the possible exception of being a DOJI or an extremely small body).
The second candle is the opposite color of the first (i.e. reversal of the trend)
Bearish Engulfing Signal Strengtheners:
If the Engulfing Signal is a large body and engulfs a very small body from the previous day, it shows the trend was slowing. The large body Engulfing Signal indicates the new direction (reversal) has started with strength.
If the uptrend was fast and furious, when the reversal hits there will be less resistance to the move down, thus increasing the profit potential.
While you ignore the shadows for determining if the signal is indeed a Bullish Engulfing Signal, if the body of the engulfing signal completely encompasses the upper and lower shadows of the previous day, it shows extremely strong support for the reversal to continue.
The larger the gap created between the open from the engulfing signal from the previous close, the greater the chance of a strong reversal.
Bearish Engulfing General Analysis:
The market trend was on its way up. The price opens higher than where it closed the previous time frame. By the end of the time frame, the sellers have come out in force and moved the price below where it opened the day before. Suddenly investor sentiment sees the trend has been changed.
The Bearish Engulfing Pattern represents the reversal of the upward trend investor sentiment. Using this pattern as a sell signal is generally profitable because the Bearish Engulfing Pattern has signaled that the Bears are ready to sell.
