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Friday, February 29, 2008

MORNING STAR vs. EVENING STAR

Both Morning Star & Evening Star are 3-day reversal patterns.
Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Morning Star) or an uptrend (Evening Star).



Note:
The grey candle means the color of the candle’s body can be white or black (red).

MORNING STAR (BULLISH)
Morning Star is a bottom reversal pattern / bullish reversal pattern.
It may be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

Morning Star pattern consists of 3 candlesticks:
1) A long-body black/red candle, extending the existing downtrend.
2) A small candle that gapped down on the open below the close of the previous candle. The color of the small candle can be white or black/red.
3) A long-body white candle that gapped up on the open and closed above the midpoint (half) of the black/red body of the first day.

In a downtrend or during a pullback within an uptrend, the long black/red candle confirms that the sellers (bears) remain strong.
When the 2nd candle gaps down, it provides further evidence of selling pressure. However, after the gap down, the decline does not continue, or it slows significantly, and a small candle is formed. The small candle indicates the lack of ability of the sellers (bears) to continue their strength, signaling the downtrend may be weakening and a possible reversal of trend.
On the 3rd day, the price gaps up and then rallies, forming a long white candle that closes above the midpoint level the black candle on the 1st day. This confirms the bullish reversal, particularly when there is a surge in volume.

EVENING STAR (BEARISH)
Evening Star
is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

Evening Star pattern consists of 3 candlesticks:
1) A long-body white candle, extending the existing uptrend.
2) A small candle that gapped up on the open above the close of the previous candle. The color of the small candle can be white or black/red.
3) A long-body black/red candle that gapped down on the open and closed below the midpoint (half) of the white body of the first day.

In an uptrend or during a bounce within a downtrend, the white candle confirms that the buyers (bulls) still dominate.
When the 2nd candle gaps up, it provides more evidence of buying pressure. However, after the gap up, the rally does not continue, or it slows significantly, and a small candle is formed. The small candle indicates the lack of ability of the sellers to continue their strength, signaling the uptrend may be weakening and a potential trend reversal could be nearing.
On the 3rd day, the price gaps down and then declines, forming a long black/red candle that closes below the midpoint level the white candle on the 1st day. This confirms the bearish reversal, particularly when there is a surge in volume.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Posts:
* FREE Trading Videos from Famous Trading Gurus
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

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