There are a multitude of bullish reversal candlestick patterns to choose from. They choose to narrow the field by focusing on the most popular for more in-depth explanations. Some of the most important bullish reversal patterns are listed here, with the number of required candlesticks in parenthesis.
- Bullish Engulfing
- Piercing Pattern
- Bullish Harami
- Hammer
- Inverted Hammer
- Morning Star
- Bullish Abandoned Baby
Bullish Confirmation
One or more candlesticks can form patterns, although most of them require bullish confirmation. Although the actual reversal suggests that purchasers have overcome previous selling pressure, it is unclear whether new buyers will drive prices higher. These patterns would be regarded neutral without confirmation and would only serve as a potential support level at best. Bullish confirmation can take the form of a gap up, a lengthy white candlestick, or a large volume rise, all of which indicate further upside potential. Because candlestick patterns are short-term and only last one or two weeks, bullish confirmation should occur within one to three days of the pattern’s occurrence.
Existing Downtrend
There must be an existing downturn to reverse for a bullish reversal to be considered. A bullish engulfing at fresh highs isn’t really a bullish reversal pattern. Such patterns could be termed continuation patterns, as they signal continuous buying pressure. The pattern in the red oval in the Ciena example below seems like a bullish engulfing, however it occurred near resistance after around a 30 point rise. The pattern is strong, but it is more likely to be a continuation than a reversal at this stage.
Moving averages, peak/trough analysis, and trend lines can all be used to determine the existence of a decline. One of the following factors could indicate that a security is in a downtrend:
The stock is currently trading at a discount to its 20-day exponential moving average (EMA). Each reaction’s peak and trough are smaller than the one before it. The stock is currently trading below its trend line. These are just a few instances of probable decline indicators. Shorter downtrends may be preferred by some traders, and assets below the 10-day EMA may be considered. The criterion you choose will be determined by your trading and preferences.
Additional Technical Analysis
Candlesticks are a great way to spot short-term reversals, but they shouldn’t be utilized alone. To improve reversal robustness, other parts of technical analysis can and should be included. Three approaches of combining classic technical analysis with candlestick analysis are presented below.
Momentum
Use oscillators to confirm bullish reversals and improving momentum. Positive divergences in MACD, PPO, Stochastics, RSI, StochRSI, or Williams %R would imply improving momentum and a bullish reversal pattern’s durability.
Flows of Money
Money Flows measures purchasing and selling pressure using volume-based indicators. Candlesticks can be utilized in conjunction with On Balance Volume (OBV), Chaikin Money Flow (CMF), and the Accumulation/Distribution Line. The strength of a reversal would be enhanced if any of these were strong. All three features might be merged for the ultimate signal for those who wish to take it a step further. In assets trading near support, look for bullish candlestick reversals with positive divergences and evidence of buying pressure.
In early October, a number of signs converged for IBM. The stock produced a bullish engulfing pattern (red oval) after a significant slide since August, which was reinforced three days later with a robust advance. Just before the stock surged, the 10-day Slow Stochastic Oscillator established a positive divergence and climbed above its trigger line. CMF exhibited steady improvement and went into positive territory a week later, while not yet being in the black.
Bullish Engulfing
Two candlesticks, the first black and the second white, make up the bullish engulfing pattern. The size of the black candlestick isn’t as vital as the shape, although it shouldn’t be a doji that’s simple to swallow. The second candlestick should be a lengthy white candlestick — the larger the candlestick, the more bullish it is. The white candlestick’s body must completely engulf the initial black candlestick’s body. The white body would ideally, but not necessary, engulf the shadows as well. Although shadows are permitted on both candlesticks, they are frequently small or nonexistent.
When selling pressure drives the security to open below the previous close after a fall, the second white candlestick begins to form. After the open, buyers rush in and push prices above the previous open, setting the stage for a strong finish and a possible short-term reversal. The stronger the engulfing and the larger the white candlestick, the more bullish the reversal. To provide bullish confirmation of this reversal pattern, more strength is required.
Sun Microsystems (SUNW) developed two bullish engulfing patterns in January 2000, which foretold two substantial advances. After a steep decrease that drove the stock well below its 20-day exponential moving average in early January, the first developed (EMA). The stock soared to the mid-forties after an instant gap up verified the pattern as bullish. The second bullish engulfing pattern formed in late January as the market corrected to support. The stock fell below its 20-day exponential moving average (EMA) and found support from its earlier gap higher. This was also a two-thirds correction of the previous advance. A bullish engulfing pattern occurred the next day, which was reinforced by a strong follow-up advance the next day.
Piercing Pattern
Two candlesticks, one black and the other white, make up the piercing pattern. The bodies of both candlesticks should be fairly huge, and the shadows should be small to nonexistent, but not always. The white candlestick must open lower than previous close as well as close above the black candlestick’s body’s midway. A close below the midway may be deemed a reversal, but it would not be positive.
Selling pressure leads the security to open below the previous close, similar to the bullish engulfing pattern, showing that sellers still have the upper hand on the open. After the open, however, buyers rush in to drive the stock higher, and it closes above the midpoint of the preceding black candlestick’s body. To provide bullish confirmation of this reversal pattern, more strength is required.
Ciena (CIEN) fell from above 80 to roughly 40 in late March and early April 2000. With an extended lower shadow, the stock initially touched 40 in early April. The stock bounced back and challenged support around 40 in mid-April, forming a piercing pattern. With a robust move above 50 the next day, the piercing pattern was confirmed. Despite a dip following confirmation, the price maintained above support and rose beyond 70. In late May, look for the morning doji star.
Bullish Harami
Two candlesticks make up the bullish harami. The first has a massive body, whereas the second has a small body that the first completely engulfs. White/white, white/black, black/white, and black/black are the four potential combinations. All harami patterns, whether bullish or bearish reversal patterns, have the same appearance. The previous trend determines whether they are bullish or bearish. After a loss, harami are considered potential bullish reversals, while after an advance, they are considered potential negative reversals. The smaller the body of the second candlestick, regardless of the color of the first candlestick, the more likely the reversal. The chances of a reversal increase if the little candlestick is a doji.
Steve Nison claims in his book Beyond Candlesticks that any color combination can make a harami, but that those formed with a white/black or white/white combination are the most bullish. The bullish reversal pattern would be stronger if the first candlestick’s body was white, because it has a huge body. A quick and persistent rebound of purchasing pressure can be seen in the long white candlestick. Following that, a little candlestick suggests consolidation. Bullish harami in white/white and white/black are less common than black/black and black/white.
A black/black or black/white combination can still be considered a bullish harami after a fall. The first lengthy black candlestick indicates that there is still a lot of selling pressure, which might mean capitulation. The little candlestick that follows forms with a gap up on the open, signaling a surge in buying pressure and the possibility of a reversal.
Hammer
One white or black candlestick with a small body, lengthy lower shadow, and small or nonexistent top shadow makes up the hammer. The bottom shadow should be at least twice the length of the body, with a considerable high/low range compared to the range over the previous 10-20 days. The hammer’s intraday low, after a fall, suggests that selling pressure is still present. The strong close, on the other hand, indicates that buyers are starting to become more active again. To provide bullish confirmation of this reversal pattern, more strength is required.
Morning Star
Three candlesticks make up the morning star:
1. A long black candlestick
2. A little white or black candlestick that overlaps the previous candlestick’s closure. This candlestick could alternatively be a doji, which would result in a morning doji star pattern.
3. A white candlestick that is long.
The black candlestick demonstrates that the downtrend is still in effect and that selling is in control. When the second candlestick gaps down, it indicates that selling pressure is increasing. However, after the gap, the drop comes to a halt or slows dramatically, and a little candlestick appears. The small candlestick denotes hesitation and the possibility of a trend reversal. The chances of a reversal increase if the little candlestick is a doji. The reversal is confirmed by the third long white candlestick, which is bullish.
Bullish Abandoned Baby
Bullish Abandoned Baby has three candlesticks and mimics the morning doji star:
1. A long black candlestick.
2. A doji that closes below the previous candlestick’s low.
3. A long white candlestick with a gap above the doji’s high.
The gaps on either side of the doji are the key distinction between the morning doji star and the bullish abandoned baby. The first gap down indicates that there is still a lot of selling pressure. However, the selling pressure subsides, and the security closes at or near the open, forming a doji. The gap up and extended white candlestick that followed the doji suggest significant buying pressure and the reversal is complete. It is not need to wait for more bullish confirmation.
Genzyme (GENZ) began to find support in the low thirties after falling below its 20-day EMA in April. The stock began developing a base on April 17, but it wasn’t until the end of May that a recognizable reversal pattern emerged. A long black candlestick, doji, and long white candlestick constituted the bullish abandoned baby. The bullish reversal was strengthened by the gaps on either side of the doji.