The first two-stick pattern is the bullish engulfing pattern. The pattern's name comes from the fact that the signal day engulfs the setup day. Both the wick and the body of the second day completely cover the same ground as the first day and then some. Also the first day of this bullish pattern is a down day, with the second day starting out looking like there's going to be more bearish trading, but this selling is reversed by the emergence of buying — so much buying that the previous day's open and highs are both surpassed. (There's also a bearish version of this pattern, and it's covered in Chapter 8. In fact, most of the bullish two-stick patterns I discuss in this chapter have a bearish counterpart.)
Spotting the bullish engulfing pattern
To find the bullish engulfing pattern, take these steps:
1. First look for a setup day with a dark candle.
If so, you're on the right track, but the following statements must also be true in order for your pattern to be a full-fledged bullish engulfing pattern:
• The wick of the signal day is longer than the wick of the setup day.
• The high of the signal day is higher than the high of the setup day.
• The low of the signal day is lower than the low of the setup day.
• The candle of the signal day is longer than the candle of the setup day. (In this case the signal day's close is higher than the setup day's open, and the open of the signal day is lower than the close of the setup day.)
Figure 7-1 includes two days that create a bullish engulfing pattern.
A bullish engulfing pattern.
The trading activity that creates this pattern is extremely bullish:
1 On Day 1 (the setup day) the bears dominate.
The open is near the high, and they push the price down all day until the close ends up near the low.
1 On Day 2 (the signal day) the bears are at it again and move the price a bit lower before the bulls come roaring in.
They arrive on the scene and immediately start pushing prices up, and they don't stop. The bulls exceed the prices from the previous day and even push the closing price up over where trading commenced the previous day.
When a bullish engulfing pattern occurs in a downtrend, that indicates that the bulls have been pushed around for some time before the pattern developed and that they're geared up to continue their buying assault on the bears for days to come.
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