Bearish Engulfing Pattern

Definition

A Bearish Engulfing Pattern is a technical analysis indicator that signals a potential reversal in price trend. It occurs when a small bullish (rising price) candlestick is immediately followed by a larger bearish (falling price) candlestick that completely ‘engulfs’ the first one. This pattern is seen as a sign that the buyers have lost control and sellers may be taking over.

Phonetic

Bearish Engulfing Pattern is pronounced as /ˈberɪʃ ɪnˈɡʌlfɪŋ ˈpætərn/.

Key Takeaways

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1. Bearish Signal: The Bearish Engulfing Pattern is primarily considered a bearish reversal signal. It typically occurs at the end of an uptrend and signifies a potential change in the market sentiment, from bullish to bearish.
2. Pattern Structure: This pattern consists of a small green (bullish) candlestick encompassed by a large red (bearish) candlestick. The first candle represents the residual buying pressure, while the larger red candle indicates a surge in selling pressure.
3. Confirmation: Traders often wait for additional confirmation after the appearance of a Bearish Engulfing Pattern to validate its signal. This confirmation might be a further decline in the next trading session or a gap down.

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Importance

The Bearish Engulfing Pattern is an important technical analysis indicator in the field of business and finance, specifically in stock market trading. It signals to investors a potential tipping point in the market where the sellers have overcome the buyers, indicating a potential downward shift in stock prices. Therefore, traders often view this pattern as a sign to sell or short a stock, making it vital in seeing possible negative trends and making informed, potentially profitable decisions. Recognizing this pattern can prevent loss, making it an important tool in effective investment strategy.

Explanation

The Bearish Engulfing Pattern is used within the realm of technical analysis in finance, serving as a key tool for investors and traders who are mapping out their market strategies. Its primary purpose is to identify possible reversals in price trends, specifically bullish to bearish transitions. This makes it incredibly valuable in predicting potential downtrends, hence enabling investors to make strategic selling decisions to avoid losses, or even profit from shorting.When a Bearish Engulfing Pattern is observed, it suggests increased selling pressure indicating that sellers have overtaken buyer demand. The pattern, therefore, serves as a direct representation of the shift in market sentiment from bullish to bearish, highlighting a potential opportunity to exit long positions or initiate short positions. It’s essential for investors and traders to understand this pattern to better judge the timing of their market moves, thereby optimizing their portfolio performance or trade profitability.

Examples

1. **Bitcoin Market (2018):** In 2018, Bitcoin had seen a steady rise in the market for a while until a bearish engulfing pattern emerged in the graph in December. It showed a day of gains followed by a larger tumble that engulfed the previous day’s growth, signaling a shift from bullishness to bearishness. It played out just as predicted, as Bitcoin’s price fell from approximately $13,880 to less than $4,000 over the following year.2. **Stock of Amazon (2020):** Amazon’s stock showed a bearish engulfing pattern on September 4th, 2020. The stock had experienced significant gain in the previous months, but that day, the stock opened at higher than the previous day’s close only to decline and finish the day below the previous day’s opening price. This triggered a downturn and the stock went on to decline for the next several weeks.3. **Forex Market – Euro against the Dollar (2011):** Back in August 2011, a bearish engulfing pattern occurred in the forex market with the Euro against the US Dollar. After a period of a modest uptrend, a bearish engulfing pattern emerged, where the next day’s large red candlestick engulfed the previous day’s small green candlestick. The currency pair indeed fell for the subsequent few weeks, validating the bearish prediction.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Candlestick Chart
• Downtrend Market
• Technical Analysis
• Trading Strategy
• Market Sentiment

Sources for More Information

• Investopedia
• BabyPips
• Forex
• TradingView