Bullish and Bearish Engulfing Patterns

Now imagine you're at a crossroad, trying to decide whether to keep going straight or turn based on traffic signals. In the stock market, Bullish and Bearish Engulfing Patterns are like those signals, offering clear signs that the market might shift direction. These patterns provide traders with powerful clues about potential trend reversals, making them essential tools in Technical Analysis (TA).

In this chapter, we’ll explore what Bullish and Bearish Engulfing Patterns are, how they work, and how traders use them to make informed decisions. Before we dive into examples, let's first understand what makes these patterns so important.

What Are Engulfing Patterns?

An engulfing pattern is a two-candlestick pattern that signals a potential reversal in the market’s current trend. The name comes from how the second candlestick "engulfs" the first one, indicating a dramatic shift in market sentiment. These patterns come in two forms:

• Bullish Engulfing: Signals a potential upward reversal after a downtrend.
• Bearish Engulfing: Suggests a downward reversal after an uptrend.

Both patterns help traders spot moments when the market might switch direction, much like a signal light changing from green to red. Now that you have an overview, let’s break down the Bullish Engulfing Pattern.

1. Bullish Engulfing Pattern: Signaling a Market Rebound

A Bullish Engulfing Pattern forms when a small bearish candlestick (red or black) is followed by a larger bullish candlestick (green or white) that completely engulfs the previous one. This indicates that buyers have taken control after a period of selling, signalling that the price may rise.

How to Spot a Bullish Engulfing Pattern

• The first candle is small and bearish, meaning the stock opened higher and closed lower.
• The second candle is larger and bullish, meaning it opened lower but closed higher, engulfing the previous bearish candle.
• It forms after a downtrend, signalling a potential reversal to the upside.

Reference of the Bullish Engulfing Candlestick

This pattern shows that buyers have overpowered the sellers, creating a turning point. Now, let’s see how this plays out in real life with a practical example.

Example: Bullish Engulfing in Tata Motors

Image Courtesy: Tradingview

For Example, Tata Motors has been in a downtrend for several days, and traders are unsure if the stock will continue to decline. Then, one day, a small red candle forms, followed by a large green candle that completely engulfs the previous one. This Bullish Engulfing Pattern signals that buyers are stepping back into the market, and the price is likely to rise.

A savvy trader would see this as an opportunity to buy, expecting a bullish reversal in the price. However, just as traders look for signs of a rebound after a downtrend, the opposite is true in an uptrend with the Bearish Engulfing Pattern.

2. Bearish Engulfing Pattern: A Warning of Decline

The Bearish Engulfing Pattern works in the opposite way to the bullish version. It forms when a small bullish candlestick (green or white) is followed by a larger bearish candlestick (red or black) that engulfs the previous one. This signals that sellers have overtaken buyers, potentially indicating a downward reversal after an uptrend.

How to Spot a Bearish Engulfing Pattern

• The first candle is small and bullish, meaning the stock opened lower and closed higher.
• The second candle is larger and bearish, meaning it opened higher and closed lower, engulfing the previous bullish candle.
• It forms after an uptrend, signalling a potential reversal to the downside.

Reference of the Bearish Engulfing Candlestick

This pattern suggests that sellers have gained control of the market, and the price may fall. Let’s explore how a Bearish Engulfing Pattern can help a trader make the decision to sell or avoid buying.

Example: Bearish Engulfing in Reliance Industries

Image Courtesy: Tradingview

Let’s say Reliance Industries has been in an uptrend, with prices rising steadily. After several days of gains, a small green candle forms, followed by a large red candle that engulfs it. This Bearish Engulfing Pattern signals that sellers have taken control, and the price may soon fall.

A trader seeing this pattern might choose to sell or take profits, anticipating that the market will soon reverse and the price will drop. But how can you be sure that these patterns are reliable?

Confirming Engulfing Patterns with Volume

Just as a traffic light is more reliable when followed by clear road signs, Engulfing Patterns are stronger when confirmed by other indicators, particularly trading volume. High volume during the second candlestick suggests that the reversal is supported by a large number of traders, making it more likely to be a valid signal.

• Bullish Engulfing + High Volume: Confirms that buyers have entered the market with strong momentum, increasing the likelihood of a price rise.

• Bearish Engulfing + High Volume: Confirms that sellers have taken control, making it more likely that the price will drop.

Volume acts as a vote of confidence in the pattern, showing that a significant number of traders back the shift in market sentiment. But volume isn’t the only way to increase confidence in these patterns.

How Traders Use Engulfing Patterns in Combination with Other Indicators?

While Engulfing Patterns are strong signals on their own, they work best when combined with other technical indicators such as:

• Support and Resistance Levels: A Bullish Engulfing Pattern forming near a support level adds strength to the reversal signal. Similarly, a Bearish Engulfing Pattern near resistance makes a downward reversal more likely.

• Moving Averages: If a Bullish Engulfing Pattern occurs above the 50-day moving average, it further confirms the trend reversal. On the flip side, if a Bearish Engulfing Pattern occurs below the moving average, it’s a stronger signal that the price will continue downward.

By using these additional tools, traders can confirm the validity of the Engulfing Patterns and make better decisions about when to enter or exit trades.

Conclusion

The Bullish and Bearish Engulfing Patterns are powerful tools for spotting potential trend reversals in the stock market. Whether you're looking to buy after a downtrend or sell after an uptrend, these patterns can provide clear signals about the market's next move. When combined with volume and other indicators like support/resistance levels or moving averages, Engulfing Patterns become even more reliable.

Now that you understand how these patterns work, you can start incorporating them into your trading strategy. Keep an eye out for the Bullish Engulfing Pattern signalling a rebound and the Bearish Engulfing Pattern warning of a downturn—both can be key to making timely trading decisions.