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Bullish Engulfing

What Is a Bullish Engulfing Pattern?

A bullish engulfing pattern is a white candlestick that closes higher than the previous day’s opening after opening lower than the previous day’s close.

It can be identified when a small black candlestick, showing a bearish trend, is followed the next day by a large white candlestick, showing a bullish trend, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.

A bullish engulfing pattern may be contrasted with a bearish engulfing pattern.

bullish engulfing

Understanding a Bullish Engulfing Pattern

The bullish engulfing pattern is a two-candle reversal pattern.

The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows.

This pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle.

On the second day of the pattern, the price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers.

What Does a Bullish Engulfing Pattern Tell You?

A bullish engulfing pattern is not to be interpreted as simply a white candlestick, representing upward price movement, following a black candlestick, representing downward price movement.

For a bullish engulfing pattern to form, the stock must open at a lower price on Day 2 than it closed at on Day 1.

If the price did not gap down, the body of the white candlestick would not have a chance to engulf the body of the previous day’s black candlestick.

Because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the white candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning only to have bulls decisively take over by the end of the day.

The white candlestick of a bullish engulfing pattern typically has a small upper wick, if any.

That means the stock closed at or near its highest price, suggesting that the day ended while the price was still surging upward.

This lack of an upper wick makes it more likely that the next day will produce another white candlestick that will close higher than the bullish engulfing pattern closed, though it’s also possible that the next day will produce a black candlestick after gapping up at the opening.

Because bullish engulfing patterns tend to signify trend reversals, analysts pay particular attention to them.

Bullish Engulfing Pattern vs. Bearish Engulfing Pattern

These two patterns are opposites of one another.

A bearish engulfing pattern occurs after a price moves higher and indicates lower prices to come.

Here, the first candle in the two-candle pattern is an up candle.

The second candle is a larger down candle, with a real body that fully engulfs the smaller up candle.

Limitations of Using Engulfing Patterns

A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof.

Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside.

If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge.

This can leave a trader with a very large stop loss if they opt to trade the pattern.

The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target.

Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Concluding Thoughts

The bullish engulfing pattern is a widely recognized signal that can indicate a potential trend reversal.

However, it should not be relied upon in isolation.

Traders must consider the broader market context and use additional technical indicators to confirm the pattern’s validity.

While powerful, the pattern also comes with limitations, particularly in volatile markets where it may be less reliable.

Proper risk management and a clear exit strategy are essential when trading based on bullish engulfing patterns.

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On Neck Pattern

The on neck pattern occurs when a long real-bodied down candle is followed by a smaller real-bodied up candle that gaps down on the open but then closes near the prior candle’s close.

The pattern is called a neckline because the two closing prices are the same (or almost the same) across the two candles, forming a horizontal neckline.

On Neck Pattern

The pattern is theoretically considered a continuation pattern, indicating that the price will continue lower following the pattern.

In reality, that only occurs about half the time.

Therefore, the pattern also often indicates at least a short-term reversal higher.

The on neck pattern occurs during a downtrend, or a pullback within an uptrend, when a bearish candle with a long real body is followed by a smaller bullish candle that fails to close above the bearish candle’s close.

The small bullish candle could take any number of forms, such as a doji, rickshaw man, or any bull candle with a smaller real body than the prior candle, but the closing prices of the two candles should be equal or nearly equal.

The pattern shows bulls attempting a rally that ends up fizzling out on the second candle, unable to push the close above the prior candle’s close.

Theoretically, it is expected that the price will continue lower following the pattern.

According to the Encyclopedia of Candlestick Charts by Thomas Bulkowski, the price only continues to the downside 56% of the time.

The rest of the time it will be acting as a reversal pattern to the upside.

Bulkowski’s study found that while the price did tend to continue lower more often, when the price did reverse to the upside, the ensuing move was larger.

Therefore, traders may prefer to actually watch for a move higher following the pattern to signal an upside reversal.

These types of up moves tend to be slightly larger than declines that follow the pattern.

Traders should use the on neck pattern in conjunction with other forms of technical analysis, such as chart patterns or technical indicators.

This is because the pattern could result in a move in either direction, so confirming data may help signal which direction that is likely to be.

Traders also have the option of waiting for confirmation candles.

Confirmation candles are the candles that follow the pattern, moving either up or down, alerting the trader which direction the price could move further.

For example, if the pattern forms and then the price drops below the low of the second candle, that could be interpreted as confirmation that the price is heading lower.

In the psychology behind the on neck pattern, the security is engaged in a primary downtrend or a major pullback within a primary uptrend.

The first candle posts a long black real body.

This weak price action increases bearish complacency while forcing weakened bulls into full retreat.

The security gaps down on the second candle and sells off to a new low, but buyers take control and are able to lift the price to the prior close but not above it.

The bears see that the bulls lacked the power to push the price above the prior close.

The theory is that the bears will take control over the next several candles, pushing the price lower.

However, as discussed, in reality, this only occurs about half the time.

Thus the pattern puts both bears and bulls on edge, resulting in essentially a coin flip as to whether prices will go higher or lower following the pattern.

An example of the on neck pattern can be seen on the daily chart of Apple Inc. (AAPL), where two on neck patterns occurred during pullbacks within an overall uptrend.

In this case, the price proceeded higher following the pattern.

Once the price started to move up following the pattern, a stop loss could be instituted below the pattern to control risk in the event the price started to decline again.

The difference between the on neck pattern and counterattack lines lies in their structure.

Counterattack lines are very similar to the on neck pattern, except that with counterattack lines the down candle and up candle have real bodies of similar size.

In the on neck pattern, the second candle is smaller.

In theory, the on neck pattern is a continuation pattern, while counterattack lines are a reversal pattern.

However, the on neck pattern has its limitations.

Following the pattern, the price could move higher or lower with nearly equal odds.

Moves to the upside following the pattern tend to be larger than moves to the downside.

Trading based on the pattern could result in any number of variations.

While a breakout lower is relatively easy to define as a drop below the low (or close) of the second candle, the trader will need to decide if they view a move above the high (or close) of the second candle or first candle as the breakout point higher.

A method of profit-taking must be devised as the candlestick pattern doesn’t have an inherent profit target.

The pattern is best used in conjunction with confirming evidence from other technical indicators and methods.

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Up Gap Side-by-Side White Lines & Down Gap Side-by-Side White Lines

The up/down gap side-by-side white lines is a continuation pattern that can signal the persistence of the current trend, either upward or downward.

While it is a moderately reliable indicator, its rarity and the often muted price movements following its occurrence mean that it should be used in conjunction with other technical analysis tools.

The up version is a large up (white or green) candle followed by a gap and then two more white candles of similar size to each other.

Up Gap Side By Side White Lines

The down version is a large down (black or red) candle followed by two white candles of similar size.

Down Gap Side By Side White Lines

When the pattern occurs, which is rare, it is expected that the price will continue moving in the current trend direction—down or up, as the case may be.

 

The up gap side-by-side white lines is a bullish continuation pattern with the following characteristics:

The market is in an uptrend.

The first candle is a white candle.

The second candle opens above the close of the first candle (gap up).

The third candle has a real body with the same length as the second candle with an open that’s at the same level or higher than the real body of the first candle.

 

The down gap side-by-side white lines is a bearish continuation pattern with the following characteristics:

The market is in a downtrend.

The first candle is a black candle.

The second candle is a white candle that opens below the close of the first candle (gap down).

The third candle is a white candle with a real body that’s the same length as the second candle and opens at the same level or lower than the real body of the first candle.

 

The side-by-side white lines pattern is moderately accurate in predicting a continuation of the current trend, but it is somewhat uncommon.

A continuation occurs 66% of the time.

The pattern doesn’t always produce large price moves.

A little over 60% of the patterns produced a 6% average move in 10 days, and those patterns occurred in downtrends with a downside breakout from the pattern (downtrend continuation).

Patterns occurring in other contexts didn’t have price moves as large, according to Thomas Bulkowski’s candlestick research.

Other chart patterns or technical indicators should be used to confirm the candlestick pattern to maximize the odds of success.

Many traders opt to wait for confirmation from the pattern.

 

Confirmation is price movement that confirms the expectation of the pattern.

For example, following an up gap side-by-side white lines pattern, a trader may wait for the price to move above the highs of the pattern before initiating a long position.

A stop loss could then be placed below the low of the second or third candle or even the first candle in order to give the trade more room.

The difference between up/down gap side-by-side white lines and a three outside up/down candlestick pattern is that, unlike the former pattern, the latter is a reversal pattern, not a continuation pattern.

In the outside up pattern, a black candlestick is followed by two white candles.

In the outside down pattern, a white candle is followed by two black candles.

Up/Down Gap Side-by-Side White Lines Psychology

Up — Suppose the security is engaged in an uptrend, with confident bulls expecting higher prices.

The first candle shows a rally with a large real body and a close higher than the open.

Bull confidence increases further on the second candle, with an up gap and positive intraday price action that holds a higher high into the closing bell.

Bullish resolve is tested on the third candle, which opens with an initial drop into the opening price of the second candle.

However, the decline fails to gain traction and buyers lift the security back to the high of the second candle by the close.

This reveals diminishing bear power, raising odds for a rally and new high on the next candle.

Down — Suppose the security is engaged in a downtrend, with confident bears expecting lower prices.

The first candle posts a sell-off bar with a large real body and a close lower than the open.

Bear confidence is shaken on the second candle, with a down gap and strong intraday price action that holds below the gap into the closing bell.

Bearish resolve grows on the third candle, which opens with a down gap into the opening price of the second candle.

Once again strong intraday price action fails to pierce gap resistance.

This reveals diminishing bull power, raising odds for a decline and new low on the next candle.

Up/Down Gap Side by Side White Lines Limitations

The pattern is rare, which means finding it and opportunities to use it will be limited.

The pattern has moderate reliability, which means that ideally the candlestick pattern should be coupled with other forms of analysis and confirmed by other trade signals.

Following the pattern, the pattern that tended to produce large price moves was the down gap version occurring in a downtrend.

The pattern served to act as a downtrend continuation pattern.

This pattern, and candlestick patterns in general, don’t provide a price target.

It is up to the trader to determine when they will exit a profitable trade.

Waiting for price confirmation following the pattern is recommended.

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Bullish Three Line Break & Bearish Three Line Break

Bullish Three Line Break

Definition

A bullish three line break structure is comprised of four Japanese candlesticks.

The first three candlesticks are bullish (green) and small.

The opening occurs at the closing price of the previous candlestick, and the closing occurs at the highest point of the candlestick.

The fourth candlestick is large, bearish (red), and encompasses the three bullish candlesticks.

It must close below the opening level of the first one.

Bullish three line break

Characteristic
A bullish three line break structure often forms after a significant rise characterized by several large green Japanese candlesticks.

Significance

Contrary to what one might think, this does not signal a reversal of the trend.

A bullish three line break is a continuation pattern; it indicates continuation of the bullish movement.

It is the sign of significant profit-taking that allows the increase to start again on a good basis.

Note
It is important that the three bullish candlesticks close at their high point.

Invalidation
If the closing of the last candlestick does not occur below the opening level of the first candlestick, or if the closing does not occur at the low point, then the bullish three line break structure is invalidated.

Bearish Three Line Break

Definition

A bearish three line break structure is comprised of four Japanese candlesticks.

The first three candlesticks are bearish (red) and small.

The opening occurs at the closing price of the previous candlestick, and the closing occurs at the lowest point of the candlestick.

The fourth candlestick is large, bullish (green), and encompasses the three bearish candlesticks.

It must close below the opening level of the first one.

Bearish three line break

Characteristic
A bearish three line break structure often forms after a significant drop characterized by several large red Japanese candlesticks.

Significance
Contrary to what one might think, this does not signal a reversal of the trend.

A bearish three line break is a continuation pattern; it indicates continuation of the downward movement.

This is a sign of significant profit-taking that allows the drop to start again on a good basis.

Note
It is important that the three bearish candlesticks close at their low point.

Invalidation
If the closing of the last candlestick does not occur below the closing level of the first candlestick, or if the closing does not occur at the high point, then the bearish three line break structure is invalidated.

Concluding Thoughts

The bullish and bearish three line break patterns are continuation patterns that, despite their appearance, do not signal a reversal.

Instead, they indicate a temporary pause for profit-taking before the original trend continues.

Understanding these patterns can help traders identify moments of consolidation within a trend, allowing them to make informed decisions about the continuation of the market direction.

It is crucial to validate these patterns with proper closing levels to avoid false signals.

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Mat Hold Pattern

What Is a Mat Hold Pattern?

A mat hold pattern is a candlestick formation that indicates the continuation of a prior move.

There can be either bearish or bullish mat hold patterns.

A bullish pattern starts with a large upward candle followed by a gap higher and three smaller candles that move lower.

These smaller candles must stay above the low of the first candle.

The fifth candle is a large candle that moves to the upside again.

This pattern occurs within an overall uptrend.

The bearish version is similar, except candles one and five are large down candles, and candles two through four are smaller and move to the upside.

These smaller candles must stay below the high of the first candle.

The pattern completes with a long candle to the downside, which is the fifth candle.

It must occur within a downtrend.

What the Mat Hold Pattern Tells You

When a bullish mat hold pattern occurs within an uptrend, it signals that the uptrend is likely resuming to the upside.

Traders may opt to buy near the close of the fifth candle (the large up candle) or enter a long trade on the following candle.

A stop loss is typically placed below the low of the fifth candle.

When a bearish mat hold pattern occurs within a downtrend, it indicates the downtrend is likely resuming, and prices will continue to fall.

Traders may opt to sell or short near the close of the fifth candle or on the following candle.

A stop loss on short positions is placed above the high of the fifth candle.

Both versions of the pattern are quite rare.

They demonstrate that the price is moving strongly in the trending direction (candle one), and there is only minor pressure in the opposite direction (candles two through four) before the price starts moving in the trending direction again (candle five).

What is the Difference Between a Mat Hold and a Rising Three Pattern?

A rising three pattern is very similar to a mat hold pattern, except there isn’t a gap following the first candle.

This pattern is also not very common.

Limitations of the Mat Hold Pattern

The mat hold pattern is difficult to find.

It occurs infrequently, and the price doesn’t always move as expected following the pattern.

There is no profit target for the mat hold pattern.

Even if the price moves as expected, the pattern doesn’t indicate how far the price could run.

This will require another method, such as trend analysis or technical indicators, to determine an exit, or possibly another candlestick pattern.

The mat hold pattern is typically best used in conjunction with other forms of analysis, as it may be unreliable if traded solely on its own.

Concluding Thoughts

The mat hold pattern can be a powerful tool for traders looking to identify continuation patterns within a trend.

However, due to its rarity and the potential for deviations, it is essential to use this pattern in conjunction with other technical analysis methods.

By doing so, traders can improve their chances of success and better navigate the complexities of market movements.

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