Bullish Star Pattern

Bullish Star properties

If the market is in a downtrend and you see a small bodied candle immediately after a big red one this may be a sign that the downtrend is on the wane. If this candle was seen within the previous red candle’s real body it would be a Harami, however if the second, small bodied candle gaps lower with a bad start it’s called a Star.

The bears are in charge because the market is in a downtrend, and the big lower open is just further proof that the bears are doing all the bossing. But if this great start from the sellers doesn’t see any subsequent “oomph” then we should start to get concerned that maybe the bears are losing the will or the ability to keep it going. 

Figure 4-12: Shire Pharmaceuticals Group pic; daily candlestick chart; 26 November 2007 - 26 February 2008, showing several Star combinations

Figure 4-12 shows three Bullish Stars. The first didn’t work at all. There was absolutely no subsequent confirmation, and therefore I wouldn’t have taken this signal.

The second saw the market gap quite a bit lower on the Star day, and it then rallied into the close to post a green real body (remember though, the colour of the real body is not that important for this pattern, although obviously the close at the top of the day’s range in this instance may well have added some conviction). As you can see I got some instant gratification on this occasion with a strong up day the next day.

But the rally soon petered out and the market decided to come back and fill the gap seen after our Star formation (see Chapter 5 for a discussion of gaps). In doing this another Star pattern was formed, and this time there was a decent rally for several sessions after the gap-filling Star.

Summary

If you are in a strong downtrend you will likely see a fair few big down days posted, with large filled real bodies. If after one of these the market opens significantly lower but then does nothing for the rest of the day, this lack of reaction can be taken as a warning signal that the selling is stalling.

So we can see that the Star patterns that work the best are the ones where there’s confirmation subsequently, which sets the scene nicely for the next pair of patterns: the Morning and Evening Stars.