The hammer line pattern and hanging line pattern are composed of a single candle line. As discussed earlier, they can send important technical signals about the health of the market.
However, in most cases, candlestick technical signals are composed of several candlesticks.
The engulfing pattern belongs to the main reversal pattern and is composed of two candle line entities of opposite colors.
Bullish engulfing pattern
The bullish engulfing pattern consists of two candles, which implies that the market will continue to strengthen.
As shown in the figure, the market was originally in a downward trend, but then a solid white entity appeared, and this white entity “hooked” the black entity in front of it, or engulfed it.
This situation shows that the buying pressure in the market has overwhelmed the selling pressure.
Bearish engulfing pattern
A bearish engulfing pattern is the opposite of a bullish engulfing pattern. The bearish engulfing pattern shows that the market was originally moving towards higher prices. But after the former white entity is engulfed by the latter black entity, it constitutes a signal of top reversal.
This situation shows that Xiong Fang has taken away the ruling power from Niu Fang.
Three criteria for determining the engulfing form:
- Before engulfing the pattern, the market must be in a clearly identifiable upward or downward trend, even if this trend is short-lived;
- The engulfing pattern must consist of 2 candle lines. The entity of the second candle line must cover the entity of the first candle line (but it does not necessarily need to engulf the upper and lower shadow lines of the former);
- The second entity of the engulfing form must have the opposite color as the first entity. The exception is that the entity of the first candle line must be very small, and the small one almost constitutes a cross, or just a cross.
In this way, if a small white entity is engulfed by a huge white entity after a long-term downward trend, then it may also constitute a bottom reversal pattern. Conversely, in an upward trend, if a small black entity is engulfed by a huge black entity, it may also constitute a top reversal pattern.
If the engulfing morphology has the following characteristics, the possibility of constituting an important reversal signal will be greatly enhanced.
- In the engulfing form, the entity on the first day is very small, while the entity on the second day is very large. This situation may indicate that the driving force of the original trend is fading, and the potential force of the new trend is growing;
- The engulfing pattern appears after a very long-term or very sharp market movement. If there is an ultra-long-term upward trend, this possibility is increased: potential buyers have entered the market and held long positions. In this case, the market may lack sufficient supply of new long positions, unable to continue to push the market up. If there is a very sharp market movement, then the market may have gone too far in one direction and is vulnerable to profit closing positions;
- In the engulfing form, the second entity is accompanied by excess transaction volume. This situation may be a skyrocketing phenomenon;
- In the engulfing form, more than one entity engulfed forward in the next day.