Bearish engulfing patterns typically happen at the top of uptrends. They are a two-candlestick pattern setup; the first candle is a small bullish candle followed by a second larger bearish candle that completely engulfs the first candle. Look for the price to fail the second candle and hold to confirm bearish continuation.
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A bearish engulfing pattern consists of two candlesticks that form near resistance levels where the second bearish candle engulfs the smaller first bullish candle. Typically, when the second smaller candle engulfs the first, the price fails and causes a bearish reversal.
The bearish engulfing pattern signals the possible end of a bullish trend. Confirmation is needed for this pattern to set up and break.
Made up of two candlesticks, the first candle is a small bullish candlestick with small wicks. At the same time, the second candlestick is a bearish one that engulfs the small bullish one.
The name of the chart pattern implies what the future may bring—a bearish trend engulfing the previous bullish one to reverse it.
This is an example of a bearish engulfing pattern. The blue candlestick is a bullish candlestick that formed during an uptrend. The large orange bearish candlestick completely engulfs the bullish candle, which starts the pattern. To trade this pattern, traders enter a short position once the price falls below the second candlestick. They place their stop loss if the price reverses and closes above the second candlestick.
Basics
This pattern typically occurs at the top of a bullish trend. Read this signal as a peak or a slowing down is moving up. It is often good to consider the prices of the stock that occurred before the bearish engulfing candle as well as after it.
Bullish momentum ends when bearish engulfing candles form, especially when the second candle’s price opens higher than the first. The more the second candle falls, the more significant the downtrend signal is. This move should be lower than the first candle.
Main Points
- It can happen in any time frame, but it is more significant if it occurs after the stock is a trend up
- The body of the stick, not the wicks, is what matters
- The body of the declining candle must engulf the candle before it was a green candle
- Ideally, both candles are big and have significant volume compared to the others around them.
- The bigger the candles, the more solid the setup
- If the market is choppy, it is not as strong a signal
- Look for trending markets to get better trade signals from this candlestick pattern
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Technicals
When they occur at the top of an uptrend, one of the most important factors of a reversal. Bearish engulfing candles can happen anywhere on a chart, but the most powerful reversal signal is when it forms at the top of a trend or a peak. Pair this with other technical analysis for even more information, such as previous support/resistance areas, moving averages, and current volume. Adding in all that information will help create a stronger game plan.
The pattern has formed at a key resistance level that the bulls cannot break. The bears no longer want the price to climb, so they step in. The highs of the bearish engulfing candle should be the highs of the pattern.
The next candle after the bearish engulfing pattern is lower than its predecessors. That is a significant signal that the trend reversal is taking place. It should start making lower lows.
Bearish Engulfing Pattern Trading Strategy
- Watch for 1st bullish candlestick to form
- Next, watch for 2nd larger candlestick to engulf 1st smaller bullish candle
- Then, watch for 3rd candlestick to fall below 2nd
- Traders take a short position once the price breaks below the 2nd candlestick
- Place stop above the top of the 2nd candle
- Some traders take a long position once the price breaks above 2nd candle
- Then place stops below the 2nd candle
- Pair this strategy with the ABCD pattern
Bullish Engulfing Pattern Example
This is an example of a bearish engulfing pattern of $AAPL on a daily chart. Notice how price action was extremely bullish until it reached a major peak. The large red candle engulfs the bullish green candle at the top of the uptrend. This signifies that a bearish reversal is about to take place.
Traders would take a short entry when the price fails the red candle and put their stop loss above the top of the candle if the trend reverses. The bigger overall pattern was a rising wedge or megaphone pattern. When a bearish engulfing pattern nears the top of these patterns, look out for a larger bearish reversal pattern to take place.
This is an example of $CAT on a 5-minute chart in the premarket. Notice how the extremely large red candlestick completely engulfed the bullish green candlestick and then had a large drop. This is why traders need to be careful trading in the premarket.
News can break at any moment and reverse the trend of a stock. It’s risky to try and take a trade on this example because the candlestick was too large. If you took a short entry, you wouldn’t want to use the whole candlestick above as a stop.
Patterns Inside Patterns
The picture above is a daily chart of $META. Many times, there are fakeouts or short-term opposite reversals with patterns. The highlighted area shows a bearish engulfing pattern near the base of a falling channel. This signals a bearish reversal; however, there was a short-term bullish rally instead of an immediate breakdown.
After the bearish engulfing took place, it formed a bullish homing pigeon, which looks like a bullish harami. It formed a short-term flag or rising wedge pattern. So, it was a temporary bullish reversal. However, the flag area formed when the preceding trend was bearish.
So, the bearish engulfing did have a brief fake, but the trend continued bearish after the bear flag broke down. This is why it is important to look at the bigger patterns that form overall. Bearish engulfing patterns are reversals. However, the bigger overall patterns tell the overall story.
Final Thoughts: Bearish Engulfing Patterns
Bearish engulfing patterns form on all time frames. They are a really popular reversal pattern that traders pay attention to especially at the top of an uptrend. When you see them happen near angular resistance of large channels such as falling and rising wedge, be aware of a potential reversal to the downside. Even though these are strong bearish reversal patterns it’s important to remember that fakeouts happen a lot with all patterns.
Frequently Asked Questions
The bearish engulfing pattern is good if a trader is bearish on a stock and bad if they are bullish. Bearish engulfing patterns signify a bearish trend reversal is about to take place. This enables the bears to take short positions, which causes the bulls to sell their positions.
Confirming a bearish engulfing pattern is when the bearish candle completely covers the bullish candlestick, and the third candlestick confirms the continuation to the downside. As the price breaks below the second candle, many short traders enter positions.
Bearish engulfing patterns signal a potential trend reversal to the downside. Day traders often use this signal to short-sell a security. Swing traders use this signal to enter into bearish options trades.
