Requirements of Bearish Engulfing

FINAL RESULTS—HOW TO TRADE THE BEARISH ENGULFING

After examining thousands of bearish engulfing patterns in different market conditions and using various filters, the test results presented here indicate that the results of the bearish engulfing pattern may be improved by: using it in downtrending or bearish markets, using a three to five day holding period, using it on higher-priced stocks, looking for volume on the second day of the pattern that is larger that the volume on the first day of the pattern, and taking patterns when the top of the second day’s body is at least 15% of the day’s range above the top of the first day’s body.

The test results also indicate that results may be diminished using the bearish engulfing pattern in the following conditions: when the NASDAQ is uptrending or bullish, holding positions more than six days, patterns with above average volume on the second day, when the first day of the pattern is a recent high, patterns where the bottom of the second day’s body is more than 15% below the bottom of the first day’s body.

The improved Bearish Engulfing pattern requirements are:

• The stock must be in an uptrend.
• The NASDAQ must be in a downtrend.
• The first day of the pattern shows a white body.
• The second day of the pattern shows a black body that overlaps the first day’s body.
• The second day volume is at least 30% above the first day’s volume.