Candlestick Patterns 101: Bullish Engulfing

After a weak open, the market appears to be rallying to a higher high today compared to last Friday. The type of pattern is fairly common and is a bullish indication. The pattern is called a bullish engulfing because the real body is “engulfing” the previous period’s body. Today’s continuation following last Thursday and Friday’s hesitation means that a lot of bullish engulfing patterns will be popping up today.

Bullish Engulfing Basics

Many times, the market takes a break. That break can be for a day or several days. This type of consolidation of similar highs and lows will eventually resolve itself by the price continuing higher or lower. The question is what type of signal will tell you that. For a bullish engulfing, the price initially gaps lower on the open as bears look to take it lower, but then the bullish step in and the price closes above the previous candles. Looking at the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) you can get a glimpse of what this pattern looks like.

Overall Rating: 1 Star

Directional Bias: Bullish Reversal

Number of Candles: 2

Frequency Rating: 4 Star

Pattern Description:

This pattern forms at the tail end of a downtrend. The formation begins with a closed candle that finishes lower than the previous day’s close. The next candle opens lower than the previous day’s close but closes higher than the previous day’s open. The body of the second (open) candle engulfs that of the first (closed) candle.

Volume Description:

Rising volume throughout the formation increases performance.

Statistical Notes:

Taller patterns with larger real bodies or longer shadows typically perform better than shorter patterns (measured by taking the difference between the highest high and lowest low of the pattern). This pattern performs best in a neutral or up trending primary trend.

Measuring Technique:

Measure the height of the formation from low to high over the two candles and add it to the closing price of the second candle.

Conclusion

Today’s bullish engulfing pattern on the SPY isn’t the strongest signal in the world, but it is an indication of a bullish continuation. These types of patterns can be helpful for measuring the next move. Today’s low may give you the anchor to add the previous swing to set targets. It also gives you a potential bullish entry in the course of a larger directional move.

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