Bullish Engulfing Candlestick Pattern
The Bullish Engulfing candlestick pattern is one of my favorite bullish reversal candlestick patterns. A Bullish Engulfing candlestick is a high confidence buy signal, especially when all the below requirements and characteristics are met.
The potential buying opportunity becomes even less risky when the possible trend reversal is confirmed by another type of technical analysis. The development of this candlestick pattern usually provides a decent scale-in buying opportunity.
The longer and steeper the downtrend is that leads up to the Bullish Engulfing candlestick pattern, the less risky the better the buying opportunity becomes as the probability for a successful reversal increases significantly.
Requirements
Listed below are the requirements for a Bullish Engulfing candlestick pattern.
- It always has a green colored real body
- It must open below the preceding candlestick’s real body
- It must also close higher than the preceding candlestick’s real body
By opening lower than the preceding candlestick’s real body and then closing above its body, it gives the look as if the current candlestick is “engulfing” or swallowing the preceding candlestick’s real body.
Characteristics & Observations
Listed below are some of the characteristics of Bullish Engulfing candlestick patterns, as well as some of my observations from using candlestick patterns for several years now.[s2If !current_user_can(access_s2member_level1)]…..
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- It is not necessary to “engulf” the shadows of the preceding candlestick, but doing so is even more bullish for an already bullish candlestick pattern
- When a Bullish Engulfing candlestick appears near an area where I calculated an Elliott wave pullback target, it gives me grater confidence in the reversal; when the candlestick appears near a supporting trendline or a target calculated from Fibonacci Tools, it again gives me greater confidence in the reversal
- The longer the downtrend is leading up to the Bullish Engulfing candlestick, the better the chances are that the share price’s trend will reverse back into an uptrend
- A Bullish Engulfing candlestick pattern that develops on heavier volume than the preceding candlestick’s volume also increases the likelihood that the downtrend is over and an uptrend is about to begin or has already begun with the development of the candlestick
Bearish Counter-Part
The bearish counterpart to the Bullish Engulfing candlestick pattern is the Bearish Engulfing candlestick pattern.
The differences between the patterns are that Bullish Engulfing candlesticks develop at the bottom of a downtrends while Bearish Engulfing candlesticks develop at the top of uptrends.
I consider Engulfing candlestick patterns as one of my favorite candlestick patterns and with their ability to signal reversals.
When these patterns are accompanied by heavier than normal buying or selling volume, there is usually little doubt that the trend has changed for the share price. Sometimes there may be one last push below its support area or above a resistance area, but that push is usually relatively quick in nature.
Support Area
The next illustration shows the support area for a Bullish Engulfing candlestick pattern. It is the very bottom of the lower shadow for the candlestick. If a subsequent candlestick can successfully close below the support area, the support area would be considered null and voided and decreases in the stock’s share price are likely to follow.
Similar to other support areas, in order to break through and close below a support area from a Bullish Engulfing candlestick pattern, an increase in selling volume is most likely necessary.
Trading Strategies
When a Bullish Engulfing candlestick pattern develops on buying volume that is significantly greater than the previous candlestick pattern’s volume, purchasing shares near the support area of the candlestick is a great area to make an initial scale-in purchase.
Immediately analyze any break below a support area. Determine if the break is happening on lower than average, average or higher than average volume. That will help to determine your next move. As with any break below a supporting area though, it is always best to wait for 2 consecutive closes below the support area before considering the support area as negated.
Real Chart Examples
This chart shows 3 different Bullish Engulfing candlestick patterns that developed on a weekly candlestick chart for Apple (AAPL). The Bullish Engulfing on the left-most side of the chart was a riskier play than the other 2 due to the shorter correction period.
2 of the 3 Bullish Engulfing Candlestick Patterns on This Weekly Chart for Apple (AAPL) Have Almost Identical Support Levels; This Creates an Even Stronger Support Level
When the buying volume for the Bullish Engulfing candlestick pattern is larger than the previous candlestick’s volume bar, the chances for a reversal increase significantly. Basically, it means the current downtrend is over or really close to the end.
Notice that after each Bullish Engulfing candlestick developed, the next uptrend remained in place for several months. Will the same thing happen for December 2016? The monthly candlestick pattern for December still needs to finish development. Let’s see if Apple’s (AAPL) share price can indeed finish developing into a Bullish Engulfing candlestick pattern for December 2016.
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