A 2-day Japanese Candlestick Reversal Pattern That Could Signal Support for US Equities

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
March 2nd, 2023

3 mins read

The last couple of educational articles have been centered around possible support for the stock market and whether it is finding support or at risk of breaking support.

Today’s article will discuss the prospect of the stock market  finding support, which could lead to higher prices to come.

Japanese Candlestick Pattern – Bullish Engulfing Pattern

 Japanese candlesticks are a bit more visually appealing chart type that technical traders use as they give a bit more detail than a western technical OHLC – Open, High, Low, Close Bar.

They really start to sing when you see two or three candlesticks trading together in successive days and those 2- and 3-day patterns become unique candle patterns in and of themselves.

They form either continuation or reversal patterns.

The 2-day pattern I am going to highlight today is of the reversal type.

It is called a Bullish Engulfing Pattern.

Figure 1: 120-day Japanese Candle Chart on SPY with Fibonacci Retracement
Figure 1: 120-day Japanese Candle Chart on SPY with Fibonacci Retracement

Figure 1 has the Fibonacci Retracement tool on the SPY over the past 120-trading days.

It has been emphasized in recent articles this could be a support price level for SPY based on Fibonacci alone as it is testing the 38.2% retracement zone (based on a 150-day fib tine frame).

Add to this technical observation another one pertaining to the Bullish Engulfing Pattern and the prospect of this price area becomes greater.

Figure 2: Bullish Engulfing Pattern (Last Two Trading Days SPY)
Figure 2: Bullish Engulfing Pattern (Last Two Trading Days SPY)

Figure 2 is an image of the last two trading days, today and yesterday, for the SPY.

The characteristic of a Bullish Engulfing Pattern is the real body / candlestick of the most recent day is larger than the real candle of the previous day.

The image looks as though the recent days candle body is ‘engulfing’ the previous days candle body.

The bottom of the candle body is the open price on the day and the top of the candle body is the close of the day.  You can see it is larger than the previous days candle body and ‘engulfs’ that body.

It indicates that even though the stock opened lower, not only did it have a bullish reversal day and close higher than its open the range of the day, it closed higher than the open and close of the previous day – a bullish indication of the bulls looking like they are taking back control of the market.

A follow-through of higher price action is needed to solidify this assessment.  If the market trades lower and closes lower than the low of the 2-day pattern then the Bullish Engulfing pattern is failing.

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