Engulf, Engulf, and Away!

In Japanese candlestick theory, the bullish engulfing candle is most viable as a reversal signal after a prior established downtrend. The candle usually follows a small-bodied day, where the bears appear to be close to running out of steam after clearly controlling the price action for quite some time on the given chart’s timeframe. The next candle then “engulfs” that prior candle, with a lower low but also a higher high, and a strong close above the high of the small candle.

As with all reversal candlestick patterns, confirmation is required. Moreover, a bullish engulfing candle on strong buy volume adds credibility to the reversal thesis, since it shows that there may have been both a selling climax with the brief lower low, followed by strong hands coming in to buy the bargain. Note that the bullish engulfing candle amounts to little more than a tease if the lows are quickly breached and the chart sinks further. If confirmed within a week or so via further upside, the idea is that you have at least a tradable bottom in place, with relatively easy stop-loss reference points.

Homeaway, Inc. has been one of many disappointing IPO’s in 2011. After being in a steep downtrend for many months, the stock printed a bullish engulfing candle on Tuesday on strong volume. These beaten-down IPO’s have been left for dead, and are the butt of many jokes amongst traders these days. With technicals and sentiment highly negative, now would be as good a time as any for a stock like AWAY to put in a bottom, with the bullish engulfing candle possibly representing a valuable clue. Let’s look for confirmation to the upside in the coming days.

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