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).
KEY TAKEAWAYS
- A bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after a price advance. This could be an uptrend or a pullback to the upside with a larger downtrend.
- Ideally, both candles are of substantial size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large.
- The real body—the difference between the open and close price of the candlesticks is what matters. The real body of the down candle must engulf the up candle.
- The pattern has far less significance in choppy markets.
What Does the Bearish Engulfing Pattern Tell You?
A bearish engulfing pattern is seen at the end of some upward price moves. It is marked by the first candle of upward momentum being overtaken, or engulfed, by a larger second candle indicating a shift toward lower prices. The pattern has greater reliability when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle. A much larger down candle shows more strength than if the down candle is only slightly larger than the up candle.
The pattern is also more reliable when it follows a clean move higher. If the price action is choppy or ranging, many engulfing patterns will occur but they are unlikely to result in major price moves since the overall price trend is choppy or ranging.
Example of How to Use a Bearish Engulfing Pattern
The chart example shows three bearish engulfing patterns that occurred in the forex market. The first bearish engulfing pattern occurs during a pullback to the upside within a larger downtrend. The price proceeds lower following the pattern.
The next two engulfing patterns are less significant considering the overall picture. The price range of the forex pair is starting to narrow, indicating choppy trading, and there is very little upward price movement prior to the patterns forming. A reversal pattern has little use if there is little to reverse. Within ranges and choppy markets engulfing patterns will occur frequently but are not usually good trading signals.