The bullish engulfing candlestick pattern is a two-bar candlestick pattern. In this pattern, the first bar is a modest down day and in the next day a larger up day follows. The up day gaps down at the open (or in other words opens at a lower price than the stock price closed at on the previous day) and ends the day higher than the previous day’s close, completely engulfing the previous day. This suggests that at the start of the session sellers sold the stock off, and then buyers came in and bought it all the way back up again and then some.
Generally speaking this is a bullish sign, and this pattern usually signifies a reversal to the upside after a downtrend. The downtrend could either be a longer-term downtrend or a shorter pullback within a larger uptrend. If this pattern is created within an uptrend or a sideways movement in stock price, it is generally accepted that it is not as significant.
The significance of this chart pattern is confirmed if on the day following the bullish engulfing pattern the next candlestick is white, the stock gaps up (opens higher) on the next day, or closes higher on the 3rd day.
Different studies put the accuracy of this signal in the 60-70% range. Here is an historic example a bullish engulfing pattern and the implications that this chart pattern had in the future price movements of the stock price:
Example: American Eagle Outfitters (AEO):
On October 4th 2011, a bullish engulfing pattern is shown in the following chart. October 3rd was a modest down day, and on October 4th the stock price opened below the previous closing price and was bid up all day. The closing price on October 4th was higher than the highest price the stock reached on October 3rd. The signal was confirmed on October 5th as the price closed higher than it did on the 4th.
As you can see in the following 2-year chart this bullish engulfing pattern occurred at the end of a down-trend. The stock doubled in price over the next year.