Scanning for Bearish Engulfing Candlestick Patterns | Do not Ignore This Chart!

It is tempting to think about Bearish Engulfing patterns because the destructive counterpart to the Bullish Engulfing sample as a result of, technically, they type of are. However the Bearish Engulfing sample additionally presents a buying and selling alternative that is distinctive to the draw back: Shares are likely to fall thrice sooner than they rise.

Why is that, precisely? Buyers are likely to prioritize the concern of loss over the pursuit of positive factors (based on buying and selling psychology). What does that imply? For merchants prepared to quick a inventory, your probabilities of catching a brief however important plunge could also be higher than catching a pointy upward spike.

And Bearish Engulfing patterns carry exceptionally favorable stats. However extra on that quickly. For now, let’s go over the essential traits of this sample.

What are the Traits of a Bearish Engulfing Sample?

A bearish engulfing sample is a two-candlestick sample that alerts a possible reversal from a bullish pattern to a bearish pattern. Listed below are its key traits:

• Current uptrend. Earlier than the bearish engulfing sample happens, there ought to be an current uptrend. This sample is a reversal sample, so it wants an upward swing to reverse.
• First candle bullish. The primary candle within the bearish engulfing sample is bullish (white or inexperienced candle), which is a part of the continuing uptrend.
• Second candle bearish. The second candle is bearish (black or pink) and “engulfs” the primary candle’s actual physique. This implies the opening value of the second candle is larger than the closing value of the primary candle, and the closing value of the second candle is decrease than that of the primary candle.
• Second candle ought to be a lot bigger. The bearish (second) candle should be bigger than the earlier bullish (first) candle. The bigger the second candle, the extra important the reversal sign is.
• Excessive buying and selling quantity to assist the reversal. The next buying and selling quantity through the session that varieties the bearish candle might point out stronger promoting stress, enhancing the reversal sign.

Based on technical analyst Thomas Bulkowski’s research, the Bearish Engulfing sample is adopted by a bearish reversal 79% of the time. Its greatest proportion of assembly its value goal happens throughout a bear market, at 76%. Total, the Bearish Engulfing sample presents some compelling stats, and if you wish to take a deeper dive, take a look at Bulkowski’s e book Encyclopedia of Candlestick Charts.

How To Scan for Bearish Engulfing Patterns

Go to Member Instruments > Scroll Superior Scan Workbench > New

Copy and paste the next code: 

[type = stock] 

AND [country is US] 

AND [[exchange is NYSE] OR [exchange is NASDAQ]] 

AND [market cap > 100] 

AND [Daily Bearish Engulfing is true] 

AND [Uptrend is true] 

AND [Daily SMA(20,Daily Volume) > 500000] 

As soon as the code is entered, click on Run Scan.

The scan yielded a number of outcomes. Essentially the most well-known inventory on the listing is Amazon (AMZN), so let’s check out that.

Bearish Engulfing Candlestick Indicators AMZN Pullback

Check out the $104 to $106 value vary within the chart beneath.

CHART 1: BEARISH ENGULFING PATTERN IN AMAZON STOCK CHART. A divergence between value highs and the stochastic oscillator signifies that AMZN might even see a pattern reversal. There’s additionally a Golden Cross within the 50- and 200-day shifting averages.Chart supply: StockCharts.com (click on on chart for dwell model). For academic functions solely.

Discover the Bearish Engulfing candle sample. The divergence between the consecutive value highs and the decrease highs within the overbought area of the Stochastic Oscillator is a pink flag that value is probably going on the verge of a reversal. The MACD hasn’t confirmed this, but it surely tends to lag, so simply keep watch over it.

Ought to AMZN start pulling again, what may it pull again to? Discover that the Golden Cross occasion on the finish of Could exhibits the extension of two shifting averages—the 50-day SMA and 200-day SMA—that may function potential assist ranges. Beneath these averages is a thick and rising layer of Ichimoku cloud. Along with indicating shopping for stress, a bullish signal particularly when thick, the inexperienced cloud additionally acts as potential assist. Converging with this vary of assist (between $104 to $106) are the biggest Quantity by Value bars, indicating each heavy buying and selling exercise and potential assist.

In case you take a look at a 12-month chart (see chart beneath), you may see that the assist vary additionally coincides with the 50% to 61.8% Fibonacci Retracement ranges ranging from the second leg of AMZN’s uptrend, and that $105 has a protracted historical past as each assist and resistance (fuchsia circles).

The Ichimoku cloud and 200-day SMA are on the chart for reference (to check with chart 1).

CHART 2: ONE-YEAR CHART OF AMZN. Right here, you see the horizontal line that represents historic assist and resistance ranges. The Fibonacci retracement ranges, beginning on the second leg of the latest uptrend, present that the 61.8% retracement is near $105.Chart supply: StockCharts.com (click on on chart for dwell model). For academic functions solely.

How Do You Commerce a Bearish Engulfing Candle?

CHART 3: TRADING AMZN. Right here you see the entry, revenue goal, and cease loss for a brief place.Chart supply: StockChartsACP. For academic functions solely.

• On the next buying and selling day (assuming the engulfing sample stays intact), you’d place a brief entry proper beneath the low of the engulfing candle;
• You’d place a cease loss on the prime of the formation (both the engulfing candle of the candle earlier than it, whichever is taller);
• Your revenue goal would both be a 100% measure of your entire formation (a one-to-one threat/reward strategy); or
• You’ll exit on the closest assist stage.

Say AMZN closed at $122.60 (see chart beneath). The excessive is $127.36 and the low is $121.70. The full threat would quantity to $5.65. For the shorter-term commerce, you’d take the dollar-value measure of this sample’s top and subtract it from the underside, giving a value goal of $116.05 to cowl your quick place.

The second, additional goal can be the near-term assist at $115 and the $104-to-$106 vary, as identified within the charts above.

Different Shares within the Scan

Listed below are another notable shares and exchange-traded funds (ETFs) that confirmed up on the scan.

ProShares UltraPro QQQ (TQQQ)

Invesco QQQ Belief (QQQ)

Adobe Techniques, Inc. (ADBE)

Shopify, Inc. (SHOP)

MetaPlatforms, Inc. (META)

Wanting Again at Walmart’s Bullish Engulfing Sample

Final week’s article mentioned the bullish aspect of this similar candlestick sample. The inventory in focus was Walmart (WMT). Much like the commerce setup above, the “measured” revenue goal had the most effective probability of succeeding. Let’s check out the way it did.

CHART 4: A WMT TRADE. The revenue commerce was reached three buying and selling days in the past.

Set a revenue goal based mostly on the formation top (147.31 – 145.01 = 2.30). Add the two.30 to the highest of the formation. This provides you $149.61, which was reached three classes later.

The Backside Line

As a result of markets are likely to fall sooner than they rise, buying and selling the quick aspect of the market can generally current sudden and dramatic alternatives. Bearish Engulfing patterns might not be surefire alerts of a decline, however they arrive fairly shut, as their stats—a 79% bearish reversal charge—appear fairly compelling. Good luck and comfortable buying and selling!

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary state of affairs, or with out consulting a monetary skilled.