Engulfing Pattern
An Engulfing Pattern is a two-session candlestick formation in which the second candle's body completely contains the first candle's body, with a bullish engulfing appearing at lows and a bearish engulfing appearing at highs.
The Engulfing Pattern requires that the second session open beyond the first session's close and close beyond the first session's open — the net effect being that the second session's body fully engulfs the first session's body. In a Bullish Engulfing, a bearish first candle is followed by a larger bullish candle whose body completely overlaps the prior body. In a Bearish Engulfing, a bullish first candle is followed by a larger bearish candle whose body completely overlaps the prior.
Historically, the Engulfing Pattern was regarded as one of the more significant two-candle reversal formations because the second candle's complete domination of the prior session's price range provided a relatively decisive indication of a shift in momentum. In a Bullish Engulfing at a price low, the second session opened below the prior close — potentially on weakness — but rallied to close above the prior open, erasing the prior session's losses and adding additional gains. This behavior historically indicated that buyers had absorbed all available supply and then some.
Volume analysis was considered important in historical engulfing studies. A Bullish Engulfing with significantly higher volume than the prior session's bearish candle was treated as more convincing than one with equivalent or lower volume. The volume on the engulfing candle was interpreted as the measure of buying (or selling, in the bearish variant) conviction behind the reversal.
The Engulfing Pattern's reliability in historical studies was enhanced when it appeared at well-defined support or resistance levels, following a prolonged directional move, or in conjunction with other reversal signals. A Bullish Engulfing appearing at a Fibonacci retracement support level with elevated volume, for instance, received more analytical attention than the same pattern appearing mid-trend with average volume.
In Japanese candlestick tradition, the equivalent of the Bullish Engulfing is referred to as 'Tsutsumi' — meaning 'wrapping.' The concept that one session completely wraps around the prior was considered a meaningful event in the supply-demand relationship.