Trading on the bearish engulfing pattern

For a real-world example of a bearish engulfing pattern that can be used for a profitable trade, have a look at Figure 8-2. Here you see the pattern appear on a chart of the exchange-traded fund (ETF) that represents the 30 stocks that trade in the Dow Jones Industrial Average (DJIA).

On this chart, there's a bearish engulfing pattern right at the end of a nice uptrend. The bulls control the setup day; an uptrend is in place, and those bulls keep it going. At the start of the signal day, the bulls continue on their buying spree and cause the opening to be higher than the setup day's close. Then the bears come in and push hard — so hard in fact that although the price had opened higher than the setup day and even traded above that day's high, the bears are still able to push things down below the setup day's low. Those bears mean business!

The overwhelming push by the bears that stops an uptrend dead in its tracks is the key to the bearish engulfing pattern. The DIA (the symbol of the ETF that trades based on the level of the DJIA) chart in Figure 8-2 is a great example of a bearish engulfing pattern scenario that can lead you to profitable results. After the bears reverse the uptrend, the signal holds, and the next day's trading doesn't come near the pre-reversal prices. If you short at the end of the pattern and ride the downtrend for a while before buying back, you have a profitable trade.

Figure 8-2:

A bearish engulfing pattern signaling a sell on the DJIA ETF.

Figure 8-2:

A bearish engulfing pattern signaling a sell on the DJIA ETF.

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