Bearish Engulfing Points To Correction In Euro

12/21/04 08:34:54 AM

by Chris Manuell

The euro remains at lofty levels and the emergence of a second bearish engulfing pattern within a few weeks suggests a correction is warranted.

Security: EU
Position: N/A

The bearish engulfing pattern is a top reversal pattern as it highlights the change in sentiment following a distinct trend. The bearish engulfing emerges when the body of a dark candle swallows the preceding body or bodies of a white candle. The bears have made a stand by driving prices lower from the open to close beneath the prior sessions open. The euro recently completed a bearish engulfing on December 2; however, the pattern was negated the following session as the market moved above the high of the bearish engulfing pattern. A failure to sustain a push higher in recent weeks has triggered another bearish engulfing pattern on December 16. This pattern has further importance, as the "engulfer" envelopes the prior bodies of three white candles.

The appearance of the bearish engulfing pattern beneath record highs demonstrates a reticence to sustain the bullish trend and that a correction is likely. The recent downturn in the average directional movement index (ADX) above the 50 level also illustrates that the recent trend has faltered. The relatived strength index (RSI) also conforms with the declining momentum posture as it has turned down after failing to move back above the 70 region.

Figure 1: Daily chart, euro index. The bearish engulfing pattern is a top reversal pattern as it highlights the change in sentiment following a distinct trend.

Graphic provided by: StockCharts.com.

Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.