Leavitt Brothers: Education - CandleStick Patterns

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	Abandoned Baby
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	Upside Tasuki Gap

Engulfing

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Pattern: reversal
Reliability: moderate

Identification
A black day is completely “engulfed” by a large white day that gaps below the black day’s low and rallies to close above its high.

The Psychology
In a downtrend or within a pullback of an uptrend, the gap down may be the blow out that causes the bulls to throw in the towel. When selling abates, bottom fishers and shorts rally the stock to close above the previous day’s high. The bullish Engulfing pattern is very common…literally dozens occur every day and many are just incidental. Watch volume for confirmation.

The bullish Engulfing is similar to the bullish Piercing Line and could be the first two days of the bullish Three Outside Up.

Here is a great example of when a bullish Engulfing pattern is very reliable. SSYS was in a solid uptrend when it established a point of support on May 28. After bouncing the stock pulled back and formed a bullish Engulfing pattern at the same support point. This candle formation presented a great entry on the long side to ride the next leg up.

BBBY also formed a bullish Engulfing pattern at a level that had previously been established as support. This is what we mean when we say this pattern is better played on a pullback within an uptrend rather than at the end of a down trend.

CSCO was trending up when it pause for a few days. It then formed a bullish Engulfing pattern as a continuation of the uptrend.

JNJ bounced around in volatile fashion and then established short term support at around 49. After a few days of churning, the stock formed a bullish Engulfing pattern that started a leg up. If this pattern would have formed as the first set of candles at 49, it is less likely the stock would have reverse, but because the stock churned around for a few days, the pattern became much more reliable.

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