What is a Bearish Engulfing Pattern?
A bearish engulfing pattern occurs in the candlestick chart of a security when a large black candlestick fully engulfs the small white candlestick from the period before. This pattern usually occurs during an uptrend and is believed to signal the start of a bearish trend in the security.
How Does a Bearish Engulfing Pattern Work?
The bearish engulfing pattern can be illustrated in the following manner using candlestick charting:
In this example, the smaller white candlestick is overshadowed (or engulfed) by the larger black candlestick. This indicates the stock opened the second period higher than the previous close and tried to push higher during the trading period. However, investors began to sell the stock, pushing the price sharply lower at the close and indicating bearish sentiment has taken over.
Why Does a Bearish Engulfing Pattern Matter?
The bearish engulfing pattern indicates a potential reversal of investor sentiment and is suggestive of a stock having reached the upper limits of its value. Consequently, the stock may experience a downward, or bearish, movement in the near future.