 A bullish engulfing pattern is made up of two candlesticks, one after another, and forms during a decline, down-trend, or where there is potential resistance.
The first candlestick has a black body (close lower than open). Shadows are fairly short, if any. The second candlestick has a white body (close higher than open) that is larger than the black body of the first candlestick and completely covers, or engulfs, the black body. The necessary conditions for this to happen are: 1) the open of the second candlestick must be lower than the close of the first, and 2) the close of the second must be higher than the previous open.
The first black candlestick signals a bearish period due to the security closing lower than the open. For the second candlestick, the bearishness continued at the open as it had a lower open than the previous close. However, buying pressure surfaced later on and propelled the security to close above the previous open, hence the bullish engulfing pattern. In fact, if analyzed further, if one would combine the two candlesticks by taking the open of the first and the close of the second, a hammer is formed, which also represents a bearish formation.
And as with most patterns, price action prior to and immediately after the bullish engulfing pattern needs to be analyzed for a confirmation for the bulls.
In the above example, the price was retesting the previous resistance and looked as if it had topped as two consecutive declining days were the result. Then the bullish engulfing pattern formed. The next day, the price gapped up at the open, on heavy volume, and thus confirmed the previous day's bullish signal.
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