In the chart above we see a Bearish Engulfing pattern that formed after a nice uptrend of SII. To most this would seem an excellent point to either get out of a long trade or to go short on the stock...both would have been a mistake. As you can see, the fourth and fifth day after our false signal formed the valid signal, which was a Bullish Kicker and SII rallied nicely.

So why was the Bearish Engulfing pattern a false signal, especially after such a nice uptrend? The answer is simple. SII had just penetrated a key resistance point on the price chart (shown by dotted line) and the Bearish Engulfing pattern simply projected a retest of this resistance area to test for support. It is important to remember that once an area of resistance is successfully penetrated and retested it will then become support.

Why was the Bullish Kicker pattern the valid signal? Because after the successful retest of the broken price resistance, this now became price support (once again, the dotted line) and buyers stepped in with vigor. Instead of a bearish reversal we would have traded the bullish continuation.

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