Bullish and Bearish Engulfing Japanese Candlestick patterns: A statistical analysis on the S&P 500 index

Abstract

Technical analysts believe that by studying past price action, it is possible to forecast future prices of specific securities. Technical analysts rely on the use of charts, which graphically show the past fluctuations of prices. This study focuses on the chart style known as Japanese candlesticks, which relies on four pieces of information for every session: Open, High, Low and Close prices. It is believed that some candle patterns possess predictive capabilities that can alert investors of imminent price tops, bottoms, or price trend continuations. For this study, we performed a statistical analysis, using historical prices of the S&P 500 index, of the effectiveness of Bullish Engulfing and Bearish Engulfing patterns, which are believed to forecast bottoms and tops respectively. Results indicate that the Bearish Engulfing provide strong short-term forecasting power when using the Open and High criteria but not the Close criterion. Likewise, the Bullish Engulfing offered strong short-term forecasting power when using the Open and Low criteria but not the Close criterion.