Figure 2-23

ENGULFING PATTERNS

(tsutsumi)

BEARISH
ENGULFING

Figure 2 – 23

1. The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.

2. Prices have been in a definable down trend, even if it has been short term.

3. The body of the second candle is opposite color of the first candle, the first candle being the color of the previous trend. The exception to this rule is when the engulfed body is a doji or an extremely small body.

Signal Enhancements

1. A large body engulfing a small body. The previous day was showing the trend was running out of steam. The large body shows that the new direction has started with good force.
2. When the engulfing pattern occurs after a fast spike up, there will less supply of stock to slow down the reversal move. A fast move makes a stock price over-extended and increases the potential for profit taking and a meaningful pullback.
3. Large volume on the engulfing day increases the chances that a blowoff day has occurred.
4. The engulfing body engulfing more than one previous body demonstrates power in the reversal.
5. If the engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
6. The greater the open gaps up from the previous close, the greater the probability of a strong reversal.

Figure 2-41

1. The up trend has been apparent.

2. The body of the first candle is white, continuing the current trend. The
second candle is an indecision formation.

3. The third day shows evidence that the bears have stepped in. That candle
should close at least halfway down the white candle.

Signal Enhancements

1. The longer the white candle and the black candle, the more forceful the
reversal.
2. The more indecision that the star day illustrates, the better probabilities
that a reversal will occur.
3. A gap between the first day and the second day adds to the probability that
a reversal is occurring.
4. A gap before and after the star day is even more desirable. The magnitude,
that the third day comes down into the white candle of the first day,
indicates the strength of the reversal

Figure 2-25

1. The lower shadow should be at least two times the length of the body.

2. The real body is at the upper end of the trading range. The color of the body is not important although a white body should have slightly more bullish implications.

3. There should be no upper shadow or a very small upper shadow.

4. The following day needs to confirm the Hammer signal with a strong bullish
day.

Signal Enhancements

1. The longer the lower shadow, the higher the potential of a reversal occurring.
2. A gap down from the previous day’s close sets up for a stronger reversal move provided the day after the Hammer signal opens higher.
3. Large volume on the Hammer day increases the chances that a blowoff day has occurred.

Figure 2-27

1. The upper shadow should be at least two times the length of the body.

2. The real body is at the upper end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.

3. There should be no upper shadow or a very small upper shadow.
4. The following day needs to confirm the Hanging Man signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

1. The longer the lower shadow, the higher the potential of a reversal occurring.
2. A gap up from the previous days close sets up for a stronger reversal move provided the day after the Hanging Man signal trades lower.
3. Large volume on the signal day increases the chances that a blowoff day has occurred although it is not a necessity.

Figure 2-43

1. The first day’s open and the second day’s open are the same. The price movement is in opposite directions from the opening price.
2. The trend has no relevance in a kicker situation.
3. The signal is usually formed by surprise news before or after market hours.
4. The price never retraces into the previous days trading range.

Signal Enhancements

1. The longer the candles, the more dramatic the price reversal.
2. Opening from yesterday’s close to yesterday’s open already is a gap. However, gapping away from the previous day’s open further enhances the reversal.

Figure 2-37

1. The down-trend has been apparent.

2. The body of the first candle is black, continuing the current trend. The
second candle is an indecision formation.

3. The third day shows evidence that the bulls have stepped in. That candle
should close at least halfway up the black candle.

Signal Enhancements

1. The longer the black candle and the white candle, the more forceful the
reversal.
2. The more indecision that the star day illustrates, the better probabilities
that a reversal will occur.
3. A gap between the first day and the second day adds to the probability that
a reversal is occurring.
4. A gap before and after the star day is even more desirable.
5. The magnitude, that the third day comes up into the black candle of the
first day, indicates the strength of the reversal.

Figure 2-29

Criteria

1. The body of the first candle is black, the body of the second candle is white.

2. The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.

3. The second day opens lower than the trading of the prior day.

4. The white candle closes more than half-way up the black candle.

Signal Enhancements

1. The longer the black candle and the white candle, the more forceful the reversal.
2. A greater the gap down from the previous days close, the more pronounced the reversal.
The higher the white candle closes into the black candle, the stronger the
reversal.
4. Large volume during these two trading days is a significant confirmation.

Figure 2-45

1. The upper shadow should be at least two times the length of the body.

2. The real body is at the lower end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.

3. There should be no lower shadow or a very small lower shadow.

4. The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

1. The longer the upper shadow, the higher the potential of a reversal occurring.
2. A gap up from the previous days close sets up for a stronger reversal move provided:
3. The day after the Shooting Star signal opens lower.
4. Large volume on the Shooting Star day increases the chances that a blow-off day has occurred although it is not a necessity.

Doji at the Top followed by a Gap Down

Figure 2-35

1. The body of the first candle is white, the body of the second candle is
black.

2. The up-trend has been apparent. A long white candle occurs at the end of
the trend.

3. The second day opens lower than the close of the previous day and closes
higher than the open of the prior day.

4. For a reversal signal, confirmation is needed. The next day should show
weakness.

Signal Enhancements

1. The longer the white candle and the black candle, the more forceful the
reversal.
2. The lower the black candle closes down on the white candle, the more
convincing that a reversal has occurred, despite the size of the black
candle.

Figure 2-21

1. The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.
2. Prices have been in a definable down trend, even if it has been short term.
3. The body of the second candle is opposite color of the first candle, the first candle being the color of the previous trend. The exception to this rule is when the engulfed body is a doji or an extremely small body.

Enhancements
1. A large body engulfing a small body. The previous day was showing the trend
was running out of steam. The large body shows that the new direction has
started with good force.

2. When the engulfing pattern occurs after a fast move down, there will less
supply of stock to slow down the reversal move. A fast move makes a stock
price over-extended and increases the potential for profit taking.
1. Large volume on the engulfing day increases the chances that a blowoff day has occurred.
2. The engulfing body engulfing more than one previous body demonstrates power in the reversal.
3. If the engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
4. The greater the open gaps down from the previous close, the greater the probability of a strong reversal.

Figure 2-33

1. The body of the first candle is black, the body of the second candle is white.

2. The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.

3. The second day opens higher than the close of the previous day and closes lower than the open of the prior day.

4. Unlike the Western “Inside Day”, just the body needs to remain in the
previous day’s body, where as the “Inside Day” requires both the body and the shadows to remain inside the previous day’s body.

5. For a reversal signal, further confirmation is required to indicate that the trend is now moving up.

Signal Enhancements

1. The longer the black candle and the white candle, the more forceful the reversal.
2. The higher the white candle closes up on the black candle, the more convincing that a reversal has occurred despite the size of the white candle.

Figure 2-31

1. The body of the first candle is white, the body of the second candle is black.

2. The up-trend has been evident for a good period. A long white candle occurs at
the top of the trend.

3 The second day opens higher than the trading of the prior day.

4. The black candle closes more than half-way down the white candle.

Signal Enhancements

1. The longer the white candle and the black candle, the more forceful the reversal.
2. A higher the gap up from the previous days close, the more pronounced the reversal.
3. The lower the black candle closes into the white candle, the stronger the
reversal.
4. Large volume during these two trading days is a significant confirmation