The Bearish Engulfing signal is found at the top of an uptrend.
In order for the Bearish Engulfing signal to be valid, the following conditions must exist:
The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart.
The second day of the signal should be a black candle opening above the Close of the previous day and closing below the Open of the previous day’s white candle.
The following Figure shows a Bearish Engulfing formation. During the uptrend the bulls are happy. New amateur investors can no longer resist getting into this 'un-stoppable' stock. They start piling up long positions. The stock forms a long white candle. The next day because of upward pressure on the stock, it gaps up. But now smart money is selling out. They have realized the exuberance in the stock. This creates the dark candle that engulfs the prior white candle. There is is high degree of probability that the trend is reversed at this point.
Notice the Bearish Engulfing signal in the chart of Dominion Resources Inc. The stock was showing great dominance by the bulls till three days before the signal. It slowly started giving way to indecisiveness (you can witness a Shooting Star) before the Bearish Engulfing signal finally capped the uptrend. If the black candle from the second day engulfs more than one candle from the previous trend, as in this case, it is that much more powerful in reversing that trend.
Chart courtesy of StockCharts.com
Notice the Bearish Engulfing signal in the chart of TRIVENI. After a good uptrend, stochastics were overbought and the stock formed a Bearish Engulfing signal. The size of the bearish candle showed the bears were very dominating. The stock tried to rally in the next couple of days but could not close over the halfway point of the bearish candle. The Japanese have placed a lot of emphasis on the halfway point of tall candles providing either support or resistance. The stock then tumbled down providing very good profits for the candlestick trader.
Chart courtesy of icharts.in