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A bearish engulfing pattern is a chart pattern that consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or "engulfs" the small white one. As implied by its name, a bearish engulfing pattern may provide an indication of a future bearish trend.
This type of pattern usually accompanies an uptrend in a security, possibly signaling a peak or slowdown in its advancement. However, whenever a trader analyzes any candlestick pattern, it is important for him, before making any decisions, to consider the prices of the days that precede and follow the formation of the pattern.
A bearish engulfing pattern is seen as the end of an upward trend, marked by the primary candle of upward momentum being overtaken, or engulfed, by a larger secondary candle indicating a shift toward a downtrend. This is particularly relevant when the secondary opening price is higher than the primary price. Additionally, the further down the secondary candle goes, beyond the lower edge of the primary candle, the more significant the downward trend indicator.
This information is used in hopes of anticipating a change in market conditions. If a bearish engulfing pattern is present, an investor focused on short-term gains may choose to sell the particular security if he believes prices will continue to fall, allowing him to move his investments toward a security showing growth potential. Long-term investors may not choose to sell the security, as a bearish engulfing pattern is not a guarantee of a long-term downward trend.
A candlestick is composed of three points: the open, the close and the wick. The open and close points represent the opening and closing prices, respectively, of a particular security. If the open point is below the close point, this notes an upward trend, often shown in white or blue when charted. If the open point is higher than the close, this indicates a downward trend, often shown in black or red when charted. The wicks represent the most extreme price, one for the high and one for the low, paid for a particular security during the period being analyzed.
A bullish engulfing pattern is represented by the opposite of a bearish market, with an upward trend overtaking a previous downward trend within a candlestick chart. This may be an indicator a market shift is occurring and an upward trend is on the horizon.