Morning star – a bottom reversal signal

A star — is a candle with a small body that forms a price gap with the preceding candle that has a big body (Figure 1). A gap between bodies is essential (shadows can intercross). The color of the star is of no importance. If a star is a doji it is called a doji star.

Any star especially a doji star indicates the trend is about to reverse. A small body means that the fight between bulls and bears has come to a deadlock.

Stars feature in four reversal patterns: evening star, morning star, doji star, falling star. In all the patterns the body of the star can be of any color.

«Morning star» — a bottom reversal pattern. It consists of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day. (Figure 2).

On the black candle the price plunges — the bears have the control over the market. Then a small-bodied candle appears — the bears are loosing conviction. When a strong white body appears it means the bulls seize control. The optimal Morning Star signal would have a gap before and after the star day. Though the second gap occurs rarely it doesn’t diminish the significance of the pattern. The main criterion of significance is the magnitude, that the third day comes up into the black candle of the first day.

Sometimes it happens that the pattern has not one but several stars.

Signal Enhancements of the «morning star» pattern:

• A gap after the star day.
• The magnitude, that the third day comes up into the black candle of the first day, indicates the strength of the reversal.
• Small trading volume on the first candle and big volume on the third candle.