Price Action - Engulfing

This is sort of a continuation of last post, where I briefly defined what price action is. As a refresher, price action is not a technical tool, but rather a much simpler analysis technique that traders tend to use; price action is often referred as "naked trading" since there are no tools other than price charted overtime.

There are some terminologies that are often used interchangeably to define price action patterns, among these are: setups, triggers, and signals. These setups allow us to create speculations on how the price of an asset can change. With this in mind, I will be discussing one of the setups I've researched and apply it to $NKE for consistency.

Bullish & Bearish Engulfing

A two candle-stick pattern, where the first one is a small candle and the second one is bigger than the first engulfing the previous candle. Hence, the name. When looking at a chart, when the first candle is short and green, followed by a larger red, we can assume it will be a bearish engulfing. On the flip side, when we observe a small red candle first and the second candle is a much larger green candle, then we can deem it as a bullish engulfing. Now, there are other factors that would contribute to the decision making on whether we enter or exit the trade, we will be discussing that later on. For now, look at the chart below for reference on engulfing setup:

Certainly, two candle sticks are not the only thing to rely on when looking to enter/exit a trade. As mentioned there are other factors we must keep in mind when looking for the engulfing setup. First thing first, we look at the trend, is it a downtrend or uptrend? After we have identified the trend, we can look for the setup.

When you have identified a downtrend, you will want to look for the bullish engulfing, a small red one followed by an engulfing green one. This indicates a potential reversal. The opposite occurs when an uptrend is identified, you can spot the end of a trend by looking for the green small candle that is followed by a larger red candle, this too indicates a potential reversal (shift in uptrend). Now, I've mentioned about the psychology behind trading briefly, where each trader has their own. This is true, but there is a true psychology across the board as well to explain the reversals:

In a bullish engulfing, sellers have the upper hand at first, but buyers take over with such a strong force that by the candle’s close, prices are higher. - Trendspider.com

In a bearish engulfing, the buyers gain the upper hand at first, but the sellers overpower them, and the price is driven down. - Trendspider.com

There are many setups I've come across, but I want to make it digestible for myself and for anyone who may find this blog at any point. For this reason, I will be navigating each one at the time and applying them to my real life investments and options contracts. So, let's look at $NKE and see if we can identify bullish or bearish engulfing.

In the chart above, it is based on the last 5 days, but as you can see there was an uptrend the entire day, and when looking at the end of day of the 6th, we see the bearish engulfing (boxed). We can begin to see that there was in fact a shift in momentum, which is why the price went down to ~$62

Now, if I were to look at the last month's chart to make a prediction, I could say that we have been in an uptrend for some time, but if you look at the last two candle sticks, you can see that there is a potential uptrend as we see one very small red engulfed by the following green one. See below:

When looking at the 5 day chart I can see that we are headed for an uptrend, but the volume on the last candle stick is a bit worrisome in the sense that it tomorrow we may see a higher volume of sellers. However, when I look at the monthly chart, I see that there will be in fact some more pressure from buyers driving the price higher as there is a previous short red candle followed by a larger green one. What do I think? If I focus on the last 5 days, I can say that there will be a quick oversell on Monday but will immediately reverse back up. As mentioned before, I will be monitoring Monday and Tuesday. If I observe the engulfing, then I will be basing my decision to stay or walk in my current contract.

That is all for today, I am very excited for the market to open tomorrow.