Bearish Engulfing Pattern
A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or "engulfs" the smaller up candle. The pattern can be important because it shows sellers have overtaken the buyers and are pushing the price more aggressively down (down candle) than the buyers were able to push it up (up candle).
Bearish Engulfing Pattern
Definition
The Bearish Engulfing Pattern is a technical chart pattern indicating a potential price decline. It consists of a smaller bullish (white or green) candlestick followed by a larger bearish (black or red) candlestick that completely engulfs the smaller one. This pattern is significant because it shows that sellers have overtaken buyers and are pushing the price down more aggressively (bearish candle) than buyers were able to push it up (bullish candle).
Origin
The Bearish Engulfing Pattern originates from Japanese candlestick charting techniques, which were first developed by Japanese rice traders in the 18th century to predict rice prices. Over time, this technique was introduced to the West and has become widely used in modern technical analysis.
Categories and Characteristics
The Bearish Engulfing Pattern can be categorized into two types: the standard bearish engulfing pattern and the strong bearish engulfing pattern. The standard pattern is characterized by the second candle completely covering the body of the first candle, while the strong pattern covers both the body and the wicks. The standard pattern typically appears at the end of an uptrend, while the strong pattern can appear in any trend, indicating a strong reversal signal.
Specific Cases
Case 1: On a daily stock chart, after several days of rising prices, a small bullish candle appears, followed by a large bearish candle that completely engulfs the previous day's bullish candle. This indicates a shift in market sentiment, with sellers gaining strength, suggesting that prices may decline.
Case 2: In the forex market, after a period of rising prices for a currency pair, a small bullish candle appears, followed by a large bearish candle that not only engulfs the previous day's bullish candle but also breaks below the lows of the previous days. This strong bearish engulfing pattern indicates a very strong selling force, suggesting that prices may continue to fall.
Common Questions
1. Is the Bearish Engulfing Pattern always accurate?
Answer: While the Bearish Engulfing Pattern is a strong reversal signal, it is not always accurate. Investors should use it in conjunction with other technical indicators and market conditions for a comprehensive analysis.
2. How can the validity of the Bearish Engulfing Pattern be confirmed?
Answer: The validity can be confirmed by observing changes in trading volume. If the volume significantly increases when the Bearish Engulfing Pattern forms, the pattern's validity is higher.
