Bullish Engulfing

Figure 4

The Bullish Engulfing formation (Figure 4) is a very strong two day reversal signal consisting of a black candle on the first day, with the price gapping down on the second day and opening lower than the close of the first day. The price then rallies and the clear candle of the second day closes higher than the first days opening price, completely engulfing the first days body. A look at the psychology behind this formation reveals the sellers, or the supply of stock, dwindling as prices move lower. When the price gaps down on the second day and buyers start to step in with force, the pattern reveals a change in investor sentiment from distribution to accumulation. There are a few things we look for to strengthen the signal:

• High volume on the second day with low volume on the first.
•A large body engulfing a small body.
• Prices heavily oversold, with prices falling faster than the angle of the trend preceding the formation.
• The body of the second day engulfing the body and the wicks of the first day.
• The pattern forms on any technical price support area such as, a trend line, major moving average, or horizontal support.