Bullish Engulfing Candlestick Pattern

Bullish engulfing candlestick pattern is a bullish reversal pattern which usually forms at downtrend and indicates that bulls are no trying to take control from bears. It is more stronger if it gets formed at any prevailing strong support zones.

Definition

This pattern can be identified by a large green candle engulfing the previous smaller red candle body appearing at the downtrend. The green body doesn’t necessarily engulf the higher & lower shadows of the red body but engulfs the red body completely. This becomes important bottom reversal point. It indicates that in a downtrend security prices opened gap down from previous close but bears lost control and bulls were able to push the price above previous day’s open taking full control.

Fig : Bullish Engulfing Candlestick Pattern

Criteria

  • Bullish Engulfing candlestick formation at downtrend/bottom is important.
  • Length of the red candle is not that important, it can even be a Doji, but the green candle should be long candle indicating good buying interest/volume.
  • Minimum Wick/Shadow at the top of engulfing candle.
  • Gap down in green candle is stronger, but the previous day close and next day open can also remain same making it a twizzer bottom.

 

Trade Psychology

As the downtrend continues, lower selling volume/pressure is observed indicating seller’s interest is fading away, the next day market opens at new low or previous close which indicates continuation of downtrend but during the day this downtrend loses the momentum and bulls take total control. Bulls overcome bears and close security’s price above the open of previous day. The higher the buying volume the more strongly will be the reversal.

There can be various times when a trader/investor can buy using the bullish engulfing candlestick pattern.

  • A trader/investor might buy the security at the close of the large green body which opened gap down but closed above previous day’s open with good volume at some specific support levels which indicates reversal of sentiment.
  • A trader/investor might buy the security next day after confirmation of the pattern by confirming that its truly a reversal point and not just another short covering rally. So buying will only happen when security prices break engulfing candle high next day or in coming days as shown in below image;

Fig : Trading Bullish Engulfing

Significance of Past Bullish Engulfing Candle

Once Bullish Engulfing candle formed on charts at important swing low/support positions, it becomes important in future as well. The High & Low of Bullish Engulfing candle becomes good support point in future as bulls will try to keep the security’s price above this candle from where they pushed it up. It can also act as resistance zone if current prices are lower than past bullish engulfing candle at previous swing low as bears will not let the bulls take control again, as this is the zone where bulls are expected to take control.

 

How To Trade

Positional Trades

If you are doing EOD analysis and you find Bullish engulfing candles in any daily or weekly chart then as per trader type 2 mentioned above you can wait for confirmation next day. After getting confirmation you can trade on the scrip positionally after finding possible resistance levels as targets or you can filter our screener during the day to find out which scrip is forming bullish engulfing pattern during the day.

Fig : Bullish Engulfing Pattern in Ambuja Cement

In above chart of Ambuja Cements, Bullish Engulfing candlesticks satisfying our criteria is formed on 2nd August 2017 and 28th September 2017. Both are formed after downtrend. If you observe the second engulfing candle it has formed around the same level as previous engulfing, so it is very strong sign of bulls again getting ready to take control and also the second engulfing candle is very larger than previous red candle. We have marked high and low of both engulfing candle, so one can take positional calls with Stop Loss below low of engulfing candle.

Intraday Trades

If you find bullish engulfing formation in any scrip whose prices are falling since start of market opening then it gives sign of reversal. This can happen in any time frame. The use of pivot points for this purpose is more helpful. Suppose you found some scrip which is down by more than 1.5% or 2% and testing it’s levels at Pivot Point S2 or S3 (for some scripts this can happen at any pivot points, mainly script should be in downtrend. ), then you can keep it into your watchlist and keep tracking it for the day. If you find any engulfing setup explained above then it gives you high probability to go long.

Observe the below charts.
In below chart you can see bullish engulfing candlestick pattern has formed near S1 on 16 October 2017 in scrip DIVISLAB at around 11.15 after downtrend. It gave strong signal to go long with SL below engulfing candle low.

Fig: Bullish Engulfing in DIVISLAB Intraday Chart

How to find such scripts

For EOD analysis and finding scrips making engulfing patterns, Click Here

During intraday trading, Click Here

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