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Last Gasp Bearish Engulfing signal

 

 

 

Usually the appearance of a Bearish Engulfing signal is indicative of an uptrend about to reverse. Note the key work here is – the uptrend. Normally, the stochastics will be in overbought conditions or very close to it. However there are times when this signal is seen in oversold conditions. What does this mean?

Logically analyzing this formation leads to the following analysis. After a downtrend, stochastics are now oversold. More and more investors are feeling the pain. Now as buyers start emerging trying to bottom fish, a white candle is formed. The next day because of positive sentiment carrying over, the stock opens up. However, panic sellers think this is a golden opportunity to get rid of their stock. They are convinced that they will not ever get higher prices. This final panic selling causes a dark engulfing candle. Smart money will notice this panic and buy into the opportunity. As a candlestick trader, you need to watch for a buy signal to be appearing soon.

The following chart shows a Bearish Engulfing candle in oversold conditions. A Harami followed by a gap up reversed the downtrend.

Chart courtesy stockcharts.com