Bearish Engulfing Candle May Give Us a Neartermed Sell Signal

Short one today. For what it’s worth, what we saw yesterday was a key reversal type bar—specifically, a Bearish Engulfing candle pattern (Japanese candlestick).

What Is Bearish Engulfing Candle Pattern

The Bearish Engulfing Candle pattern is a technical analysis chart pattern used in candlestick charting to identify potential reversals in the market. It consists of two candlesticks and is considered a strong bearish reversal signal when it appears after an uptrend. This occurs when you witness a dark (down day) real body, which engulfs the prior day’s moves.

Traders often look for confirmation of the reversal by watching the price action in the subsequent trading sessions. A follow-through decline, especially with increased volume, adds credibility to the bearish signal.

To me, the “perfect” engulfing day has symmetry. That is, today’s body engulfs the prior day in proportional width. That’s what we saw on Thursday vs Wednesday- a perfect engulfing pattern.

I used to play the video game “Pac-Man”. This pattern reminds me of that simple game, as the little yellow guy moves around the screen engulfing other yellow stuff.

Pac-Man game icon

Below are 3 examples of engulfing days over the past 2 years on the SPX. Plus yesterday. As you can see, more often than not, they do signal a reversal within 3 days or so. August 2023 was a false signal. They do bear watching—pardon the bear-pun.

S&P 500 Large Cap Index INDX (May 24, 2024 10:08am) | Bearish Engulfing Candle May Give Us a Neartermed Sell Signal

I’m not taking evasive action on this one signal. But I will if we see follow through – especially if 5200 is cracked by 3+ days.

That’s it for today, folks. Keep an eye!

The appearance of a bearish engulfing candle on the SPX is a significant indicator that warrants close attention. This pattern, reminiscent of Pac-Man’s consuming moves, often signals a potential reversal in the market. While it may not be a definitive sell signal on its own, monitoring for follow-through, especially if the 5200 level is breached over several days, could guide future trading decisions.

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