Type of Candlestick Patter Part- 7

The Engulfing pattern consists of two real bodies of opposite color
(Figures 3-7 and 3-8). The second day’s body completely engulfs the
prior day’s body. The shadows are not considered in this pattern. It is
also called the Embracing (daki) line because it embraces the previous
day’s line. When this occurs near a market top, or in an uptrend,
it indicates a shifting of the sentiment to selling. A yin Tsutsumi after
an uptrend is called the Final Daki line and is one of the Sakata techniques
discussed in a later chapter.
The first day of the Engulfing pattern has a small body and the second day has a long real body. Because the second day’s move is so
much more dramatic, it reflects a possible end to the previous trend.
If the bearish Engulfing pattern appears after a sustained move, it
increases the chance that most bulls are already long. In this case,
there may not be enough new money (bulls) to keep the market
uptrend intact.

Screenshot_24
An Engulfing pattern is similar to the traditional outside day. Just
like the Engulfing pattern, an outside day will close with prices
higher and lower than the previous range with the close in the direction
of the new trend.
Rules of Recognition
1. A definite trend must be underway.
2. The second day’s body must be completely engulfed by the
prior day’s body. This does not mean, however, that either
the top or the bottom of the two bodies cannot be equal; it
just means the both tops and both bottoms cannot be
equal.
3. The first day’s color should reflect the trend: black for a
downtrend and white for an uptrend.
4. The second real body of the engulfing pattern should be the
opposite color of the first real body.
Scenarios and Psychology behind the Pattern
Bearish Engulfing Pattern
An uptrend is in place when a small white body day occurs with not
much volume. The next day, prices open at new highs and then
quickly sell off. The sell-off is sustained by high volume and finally
closes below the open of the previous day. Emotionally, the uptrend has been damaged. If the next (third) day’s prices remain lower, a
major reversal of the uptrend has occurred.
A similar, but opposite, scenario would exist for the bullish Engulfing
pattern.
Pattern Flexibility
The second day of the Engulfing patterns engulfs more than the real
body; in other words, if the second day engulfs the shadows of the
first day, the success of the pattern will be much greater.
The color of the first day should reflect the trend of the market. In
an uptrend, the first day should be white, and vice versa. The color of
the second, or the engulfing day, should be the opposite of the fist day.
Engulfing means that no part of the first day’s real body is equal to
or outside of the second day’s real body. If the fist day’s real body was
engulfed by at least 30 percent, a much stronger pattern exists.
Pattern Breakdown
The bullish Engulfing pattern reduces to a Paper Umbrella or Hammer,
which reflects a market turning point (Figure 3-9). The bearish
Engulfing pattern reduces to a pattern similar to the Shooting Star or
possibly a Gravestone Doji, if the body is very small (Figure 3-10).

Both the bullish and bearish Engulfing patterns reduce to single lines
that fully support the interpretation.
Related Patterns
The Engulfing pattern is also the first two days of the Three Outside
patterns. The bullish Engulfing pattern would become the Three
Outside Up pattern if the third day closed higher. Likewise, the bearish
Engulfing pattern would make up the Three Outside Down patterns
if the third day closed lower.
The Engulfing pattern is also a follow-through, or more advanced
stage, of the Piercing Line and the Dark Cloud Cover. Because of this,
the Engulfing pattern is considered more important.

Screenshot_25

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