Below is a chart showing the daily price action of Red Gold. The bullish engulfing pattern is circled in blue. Please click on the chart to get a larger view.
This is a pattern involves 2 candles, and here are the rules for a bullish engulfing candle. First, the price must be in a downtrend, as this is a bullish reversal pattern.
Secondly the first candle of the pattern must be red, and must be long, which indicates that the bears are in control. Ideally, this red candle will close near the lows for the day.
Third, the second candle in the formation must open below the previous day's low, and close above the previous day's high. Ideally, the second candle will close near the highs for the day, indicating total victory for the bulls. In this way, the second candle completely envelops the first candle. This marks a change of control from bears to bulls.
The above image shows a magnified view of what happened. This bullish engulfing pattern was not perfect, as the second candle only wrapped around the real body of the first, and not the wicks as well.
The red line, in the image above, represents the 200dma, and notice how the price descended down to this line, but stopped cold at this point. This was not a coincidence, as there were many traders waiting with buy orders at this level. I have seen this happen time and time again. It makes me wonder how some people still think that market prices are completely random.
