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Notice the Bullish Engulfing signal in the chart of POT. This happening when the stochastics being in oversold conditions makes for an excellent reversal signal. Traders should also be observant in noticing the price point at which the signal was formed. There was a gap support from mid August which added to the high probability reversal situation. Anytime one notices these many signals conforming each other, the confidence should be high that the trade result would be favorable.

Bullish Engulfing Signal

 

 

 

 

 

 

The Bullish Engulfing signal is found at the bottom of a downtrend.

 

Criteria

In order for the Bullish Engulfing signal to be valid, the following conditions must exist:

  • The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.

  • The second day of the signal should be a white candle opening below the Close of the previous day and closing above the Open of the previous day’s black candle.

 

The following Figure shows a Bullish Engulfing formation. After a downtrend the bears are enjoying their dominance. Then one day the stock gaps down and opens below the previous day's close. The bulls take over the stock and close it above the previous day's open. This show of strength by the bulls often leads to a reversal for the stock.

Chart courtesy stockcharts.com

Chart courtesy icharts.in

Notice the Bullish Engulfing signal in the chart of BHARATFORG. The stock was in a slow downtrend after its huge run-up in August 09. The size of the Bullish Engulfing candle in October was a definite clue to a change in investor enthusiasm about the stock. The ideal point to buy is the day after the signal on confirmation of bullish strength.