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Far East Flavor Part 3 - Star Patterns

06/12/00 08:22:19 AM
by Han Kim

Twinkle, twinkle, little star,
How I wonder what you are.
Bearish or bullish? Here's how you can tell.

Security:   GT
Position:   Sell

Stars are a type of candlestick pattern that signal a reversal. I'll be discussing three of the more widely used star patterns: the morning star, evening star and doji star. These patterns use three consecutive candlesticks to determine a signal, with the first candlestick having a long body, followed by a short, star-shaped candlestick gapping either above or below the first candlestick, followed by a longer candlestick going in the opposite direction of the current trend, leaving the star alone in its position at the apex of the formation.

The morning star pattern, so named because it is foretelling a brighter (bullish) future, has the following characterstics:

  • It occurs during a downward trend.

  • The first of the three candlesticks must have a long, negative body.

  • The second candlestick must have a small body (positive or negative) that gaps lower than the first body.

  • The third candlestick must have a long, positive body that is well into the first body.

  • Theoretically, this reversal pattern occurs during a downward trend because the sellers outnumber the buyers, resulting in the long, negative body. When the small body appears on the following day, it indicates that the sellers are losing their momentum, no longer driving the prices lower, thus resulting in the smaller trading range. It is not until the third candlestick, with a long, positive body, that proves the sellers have lost their momentum and are outnumbered by the buyers. This is considered a bullish signal.

    An evening star pattern, foretelling the dark (bearish) future, has the following characterstics:

  • An evening star occurs during an upward trend.

  • The first of the three candlestick must have a long, positive body.

  • The second candlestick must have a small body (positive or negative) that gaps lower than the first body.

  • The third candlestick must have a long, negative body that is well into the first body.

  • The evening star formation occurs for the same reason as the morning star, except that the buyers are losing momentum to the sellers. Below is an example of the evening star, a bearish signal, that appeared in the daily candlestick chart of Goodyear Tire & Rubber Co. (GT).

    The daily candlestick chart for Goodyear Tire & Rubber Co. (GT) with an occurence of an evening star.
    Graphic provided by: TradeStation.
    The doji star is similar to the other two stars, and can occur during both trends. It also signals a reversal. The difference is in the size of the body of the second star, which in a doji formation is negligible, and not "top" shaped as it is in the evening and morning star formations.

    Han Kim Advantage Staff Writer

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