Evening Star Pattern

EVENING STAR

Description

The Evening Star pattern reveals a change of investor sentiment at the top of a trend. It is exactly opposite the Morning Star signal. Like the planet Venus, the Evening Star foretells that darkness is about to set or prices are going to go lower. It is formed after an obvious up trend. It is made by a long white body occurring at the end of an up trend, usually when the confidence has finally built up. The following day shows indecision. Of course, the Doji is the most apparent indecisive day. The same criteria involved for forming the Morning Star can be applied to the Evening Star signal. The indecision day could be a small star trading day, a Shooting Star signal, a Hanging Man signal, or any other candlestick reversal ‘sell signal.

The third day is a black candle day, illustrating the fact that the Bears have now seized control. That candle should close at least halfway down the white candle of two days prior. As experienced in the Morning Star signal, the Bears closing the price, more than halfway down the previous long bullish candle, would indicate they are now in control of the trend. The optimal Evening Star signal would have a gap before and after the star day. The change of direction is seen immediately in the color of the bodies. The symmetry in the reversal is an obvious visual feature. When it occurs in overbought condition, the prob­abilities of seeing continued selling is very high. The Evening Star signal should have investors closing out long positions and consider establishing short posi­tions.

Criteria

1.    The up trend has been apparent.

2.   The body of the first candle is white, continuing the current trend. The second candle is an indecision formation.

3.   The third day shows evidence that the Bears have stepped in. That candle should close at least halfway down the white candle.

Signal Enhancements

1.    The longer the white candle and the black candle, the more forceful the trend reversal.

2.   The more indecision that the star day illustrates, the better probabilities a reversal will occur.

3.   A gap between the first day or the second day adds to the probability a reversal is occurring.

4.   A gap before and after the star day is even more desirable. The magnitude, that the third day comes down into the white candle of the first day, indi­cates the strength of the reversal.

The Evening Star signal utilizes the normal investment psychology. Where do people usually buy? That can be visually analyzed with the appearance of a large bullish candle in overbought condition. As viewed in Fig. 2-74 (following page), the Biomet Inc. chart, after an extended uptrend a large bullish candle forewarned of the potential of a reversal signal. The Doji at the top becomes a clear indication that a change of investor sentiment could be in the making. The third day, a large black candle closing more than halfway down into the bullish candle confirms the change of investor sentiment. Visually, the reversal is very easy to see.

The symmetry of the Evening Star signal should be the important element in the analysis. The indecision day such as the Hanging Man signal or the Shoot­ing Star signal are added benefits. However, the fact that the final day of the signal closes well into the previous white candle’s body is the confirmation. Will the downtrend occur immediately? Not necessarily! Nevertheless, impor­tant information has already been conveyed. The sellers started taking control.

As illustrated in Fig. 2-75, the Red Hat Inc. chart the Evening Star signal formed and then was followed by two indecisive trading days, two Doji days. The downtrend really got underway after the gap-down on the third Doji day, be­low the black candle of the Evening Star signal.

A gap-up Doji after the bullish candle followed by a gap down in price after the Doji indicates more power in the downward reversal. Fig. 2-76, The Protein Design Labs chart reveals the beginning of a strong downtrend coming off an Evening Star signal.