A Bullish Engulfing Pattern is a Candlestick Pattern and occurs when a negative candle with a relatively small body is followed by a positive candle with a larger body. It is important that the body of the second candle fully encompasses the body of the first candle. Ideally, the second candle has no or only a very small wick at the top. This combination tells us a number of things:
- The opening price of the second candle was lower than the closing price of the first candle, so the day starts with a gap down and sellers are in control.
- However, during the trading session we notice that buyers get the upper hand and push the price up with a closing price that ends positively.
- The shorter the upper wick of the second candle, the shorter the closing price at the highest price of that day, an even stronger signal that buyers really have the upper hand.
A Bullish Engulfing Pattern is a reversal pattern. It is an indication that the current existing downward trend (short or long term) is coming to an end and a positive trend reversal is imminent. The Bearish Engulfing Pattern is the counterpart of the Bullish Engulfing Pattern.
In mid-February 2020, NCR breaks down and we see a clear downtrend lasting about a month. In mid-May, about a month later, the trading session ends with a doji-candle (candle 1 of our pattern). The next day (candle 2) the price initially opens a little lower than the closing price of the previous day but eventually the buyers enter the market and push the price up with a closing price significantly above the first candle. The upper wick of the second candle of the bullish engulfing pattern is short and shows that the closing price is close to the highest price of the day. As a result, the decline was halted and a new (interim) uptrend occurred.
The ChartMill Team