One of the strongest bullish candlestick signals is the bullish engulfing candlestick as a potential bottom reversal signal. This candle is most effective in an oversold area after a substantial downtrend. The bullish engulfing candle consists of two bodies. The first body is black or red denoting a downtrend and ideally is a small black or red candle .The second candlestick is the opposite color of white or green denoting a bullish candle. The white or green candle at first opens lower than the previous day’s close giving the idea that a downtrend will continue but a reversal happens within the candlestick and the candlestick closes higher by the end of the day. The bullish engulfing candlestick must also close above the previous days open. This is how the new white candle engulfs the previous days candle – by having the body of the white candle cover (or engulf) the previous black body. It is important to wait until the second candlestick in the pattern closes to know that a bullish engulfing candlestick exists. Once the bullish engulfing candlestick closes, the lowest low of the two candlestick lines which form the bullish engulfing pattern should act as a support level.
The example above using the Nison Candle Scanner shows a bullish engulfing candle on the SPY on 12/31/12 to the left of the arrow. The green bullish candle engulfing the previous red candlestick stands out after a series of red candles. It becomes very plain to see that a change has occurred in investor sentiment. A couple of factors make the bullish engulfing candlestick more convincing. The larger the previous days candle being engulfed is, the more effective the new trend signal can be. The lower the open of the green candle is, and then comes back up to engulf the previous day, the stronger the reversal is.
The bullish engulfing candlestick represents a complete change in psychology. So a bullish engulfing candlestick visually shows how the superior force of the bulls (ala the tall white candle) have changed the control of the market from the bears during the candles timeframe.
Using this pattern as a buy signal offers proof that the potential exists for a trend change because momentum shifted and the price closed higher than the previous candlestick.
When is the right time to buy? The Bullish Engulfing pattern reveals when the buyers have stepped in. Note in the example chart that the whole market sentiment reversed at the bullish engulfing candlestick. The signals work equally well when analyzing indexes as they do for individual stocks, commodities, futures or any other trading entity.
Having the knowledge of candlestick signals such as the bullish engulfing candlestick produces large advantages for analyzing the direction of the markets. It’s also important to put candles into context by taking into consideration if the bullish engulfing candlestick is finding support at a prior support area or being confirmed by other technical analysis methods.
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