Patterns/ Two candles

Two candles 6 min read

Bearish engulfing

An up candle, then a down candle whose body covers it completely. The mirror of the bullish version, with one practical difference: acting on it means standing against a trend that has been working.

What the shape is

Two candles. The first closes higher than it opened. The second opens at or above that close and closes at or below the first candle's open, swallowing its body.

It records the same thing as its bullish counterpart with the sign flipped: a period of buying, entirely undone by the next period of selling.

When it means something

Engulfing at the end of an advanceIllustrative
Five advancing candles, then one period that gives back the whole of the last one and closes near its low. The periods afterwards do not reclaim it. That last part is what separates this from the chart below.

The same shape, meaning nothing

A pause in a trend that resumedIllustrative
Same two-candle shape, inside an advance that simply carried on. Price was above the engulfing candle's high within a few periods. Strong trends produce these regularly; most of them are one bad period, not a top.

There is an asymmetry worth naming here. Being wrong about a bullish engulfing at the end of a decline usually costs you a missed opportunity. Being wrong about a bearish engulfing in a rising market means being positioned against something with momentum, which costs more and costs faster.

Telling them apart

  • How extended is the advance? A reversal shape five candles into a move and one thirty candles into a move are different propositions.
  • Did it form at a level? A bearish engulfing right at a prior high is a test. One in open space above all previous trading is a candle.
  • Was the high reclaimed? The pattern's claim is that the advance is over. If price closes above the engulfing candle's high, that claim has been answered.
  • Was the volume unusual? A large down body on volume well above average means real distribution. On light volume it may be one participant leaving.
Common mistake

Reading a bearish engulfing in a strong uptrend as a top, then reading each subsequent new high as confirmation that it "has to turn soon". The pattern was answered by the first close above its high. Everything after that is a position looking for a justification.

The honest summary

Mechanically identical to the bullish version, and worth more caution, because the trend it claims to end is the thing currently proving it wrong. The close above its high is the clean, unambiguous point at which the pattern has failed — and it is worth deciding in advance that you will treat it that way.

Terms used

Engulfing
A candle whose body completely covers the previous candle's body.
Distribution
Selling into strength, usually visible as heavy volume on down periods.
Extended
A move that has already travelled a long way without interruption.
Dark cloud cover
The weaker version, closing only past the midpoint — covered here.
Reclaim
Price closing back above a level it had broken below.

Patterns are the easy half

Reading the chart underneath them is the part that decides whether any of this is useful. The Charts track works through levels, volume, trend and timeframes from the beginning.

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