Engulfing Pattern

Every trading book has a chapter on candlestick patterns. A Hammer after a selloff means the bulls are stepping in. A Bearish Engulfing at the top of a run means the party is over. The pictures are convincing, and the stories behind them make sense. But do they actually predict anything? Our daily candlestick scanner has been detecting these patterns every evening, so we stored three years of prices and every pattern the scanner found, then checked what each stock did next. ...

The engulfing pattern is a two-day reversal signal. On the second day the candle’s body completely swallows the body of the day before, in the opposite colour. A big up day that wipes out a down day is a bullish engulfing; a big down day that wipes out an up day is a bearish engulfing. It’s one of the most widely quoted patterns, and it’s common enough to test properly. Our scanner has logged 15,667 bullish and 17,933 bearish engulfing patterns across 559 US stocks and ETFs since late 2023. ...