Bullish Engulfing

Figure 2. The chart presents an interesting example of a Bullish Engulfing pattern occurrence. It demonstrates why every pattern appearance should be analysed in broader market context, which in the case of daily charts can span even weeks. Prior to the Bullish Engulfing occurrence, a very strong resistance zone is built by occurrences of Falling Window, Long Black Candle (1), and Black Candle. Then the Bullish Engulfing pattern is formed. If not looking at what happens later in the future, we have to say that such pattern reliability is rather weak. For instance, its second line being the White Candle is not impressive in the context of previously formed black candles, especially the Long Black Candle (1). Also, the trading volume on the pattern occurrence is lower than the average. Surprisingly, the next day after the pattern occurrence, price gaps and forms another white candle. It breaks the trendline and creates the Three Outside Up bullish pattern. Then shortly the Long Black Candle (2) appears, and the volume increases what should be seen as a warning that the bears are sound. The mentioned resistance zone is still valid and solid, although it was created three weeks earlier. Nevertheless, the market tries to move up until the Long Black Candle (3) stops the bulls.

Figure 3. A Bearish Engulfing pattern, containing a Bearish Belt Hold one-line pattern as its second line, is confirmed by the Three Outside Down. A Long Black Candle cancels a Long White Candle, which creates a support zone prior the Bearish Engulfing pattern. The pattern, along with the Long Black Candle, forms a resistance region. Then a Bullish Engulfing pattern appears, but the following black candle closing below the trendline cannot be considered as a confirmation of the pattern. The market still tries to move up, and yet another Bullish Engulfing pattern is developed. Its weakness is, however, a small volume, which indicates the lack of faith on the bulls’ side to break the resistance area. A day after the pattern completes, price gaps upward, but the market eventually drops, showing its weakness. The appearance of a Black Candle cancels both occurrences of the Bullish Engulfing pattern.