Bearish Engulfing Pattern

The Bearish Engulfing Candlestick Pattern is a bearish reversal pattern, which usually occurs at the top of an up trend and it consists of a a small bullish candlestick with a small tail followed by a reversal candlestick that overshadows or "engulfs" the small bullish one. The opposite of the Bearish Engulfing pattern is the Bullish Engulfing pattern.

Smaller Bullish Candle (Day 1)

Larger Bearish Candle (Day 2)

So how does this pattern form?

Generally, we find ourselves in an uptrend and a bullish candle forming on Day 1. On Day 2 prices gap upwards but opening higher than Day 1 open.

On Day two the market gapped up, but the bulls fail to push prices higher. Normally this occurs when we approach near a resistance level, where there are many bears awaiting. The strength of the bears and weakness of the bulls pushes Day 2 to close lower than Day 1. In this scenario the body of Day 2 has engulfed Day 1, forming the Bearish Engulfing Pattern.

As stated above, this occurs near resistance point or pivot point, or just a strong change in sentiment in the markets. In fact prices go from a bullish gap up at the open, to the big red bearish real body candle that closes lower than the previous day’s close. Bears have successfully overpowered the bulls on the day and the sentiment is likely to continue for the few periods.

A spread betting example of a Bearish Engulfing Pattern and how to apply it in a strategy

Here is a chart below of African Barr Gold, that illustrates a Bearish Engulfing Pattern at the top of an uptrend. The question is when to sell.

1) Sell near the close of Day2. As it comes close to the end of the day, and the prices are closing lower than the previous day’s close. This is a negative sign, the more aggressive traders will sell near the close so they try to anticipate a downward move the following day(3). Ideally this pattern is accompanied by volume confirmation.

2) Sell on the open of Day 3. These are traders that wait for the complete pattern to form. End of day traders. Once they recognize the pattern they sell on the Day 3 open.

3) Wait for further confirmation to sell. Here are the more cautious traders that look for further confirmation. or look for a good entry point to sell, maybe a little bounce back up to a resistance point, then they sell. As it happened in day 3 and day 6.

The Bearish Engulfing Pattern is one of the strongest candlestick reversal patterns. The opposite pattern is the Bullish Engulfing Pattern.

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Gravestone Doji

On the other hand we have the Gravestone Doji, which is a strong bearish candlestick pattern that occurs at the top of bull trend, often near the highs.

The Gravestone Doji, as a typical Doji has it’s opening and closing at close to the same price. Rarely these two prices are the same price. However the most important feature of the Gravestone doji is that it has a long upward shadow.

This long shadow implies that the market tries to make new highs but find strong bearish resistance that push it all the way down to where prices started off, or opened. Therefore there is an overpowering of the bears over the bulls.

Below is a spread betting example of the Gravestone Doji in a Forex EURUSD trade.

As you can see prices were heading higher in an uptrend, slowed down, then tried to push higher until the bulls found bears defending the higher prices. These bears pushed the prices back to the candlestick’s opening price (gravestone Doji). The candlestick that followed was a strong bearish candlestick.

The Gravestone Doji is extremely helpful to indicate where there is strong resistance. If this resistance is broken we can find a substantial move higher.

In a spread betting system a trader would wait for the following bearish candlestick after the Gravestone Doji, as confirmation of the trend reversal. It is important to use a confirming candlestick. Some more aggressive traders would enter as the Gravestone Doji is formed; maybe with smaller stakes taking on smaller risks.