Evening Star Pattern

Evening Star Properties

An Evening Star is a three candle pattern, but if you’ve just read the previous few pages, understanding it will be a very simple task, as all we’re doing is adding one more element to a Bearish Star - an immediate confirming candle.

So there are two candles that make up a Bearish Star - a green candle followed by a small candle that gaps higher. After a really good start on day two nothing really happened, and I was raising an eyebrow that the bulls didn’t keep things going. Then the third day is a big red candle that confirms the suspicions expressed after the small gap day. The third day sees the market close well into the real body of the first candle of the three.

Once again we see that phrase “well into” with regard to the closing value of the third candlestick. Where have we seen this before? If you go back to the section on Dark Cloud Cover you’ll see that for the formation to be completed the second candle’s body has to see a close well into the real body of the first’s. We solve this slight ambiguity by using the Marabuzo line of the first candle, and the same applies here: we need to see a close on the third day below the halfway point, or Marabuzo line, of the real body of the first candle of the pattern. 

The Japanese particularly favour these patterns, and you can see why - there are three key elements needed to make up the reversal:

1.     Initial strength

2.    A day of pure indecision despite the market making a new high

3.    A session that backs up the indecisiveness of the previous session and confirms that prices had reached levels that were too high!

It is a recurring theme when you study Japanese charting techniques that the number three has almost mystical connotations. Maybe this is what makes Evening and Morning Stars so potent, it’s because they show a reversal occurring over three different candles. There are many other patterns in candlestick analysis with “three” in their name: three upside gaps, three red soldiers, rising/falling three methods, and three Buddha tops and bottoms (akin to the Western Head & Shoulders pattern).

Examples

Figure 4-13: Astra Zeneca pic; daily candlestick chart; 29 January 2007 - 8 May 2007, showing Evening Star on 19, 20, 23 April 2007

You can see on the left hand side that the market had got to within a whisker of the psychologically important £30 level on a couple of occasions, but then was faced with some weakness. The market rallied again though, several times, and in April saw a run higher that ended with an Evening Star. The day after the Evening Star had been completed the market gapped lower, and sold off over 5% in the next 8 sessions - instant gratification!

This proves something else about these powerful reversal patterns. Even though this pattern’s formation involved the market selling off just under 5% from the high, there was still plenty of weakness immediately afterwards to make money on the short side. It’s never too low to sell, nor - in a rising market - too high to buy.

Abandoned babies

This illustrates an ideal world scenario for an Evening Star pattern, with the middle candle sitting pretty on its own above the rest of the chart. In fact there is a name for a small bodied candle that sits on the chart after having gapped higher (or lower in a downtrend, below the rest of the market). It’s called an Abandoned Baby.

This is one of those patterns where as soon as you start to talk about it you start to get those “I think he may be losing his marbles” looks.

Variation - no gap on the open of day three

The cynics among you may argue at this point that we don’t live in an ideal world, and even when I’m in my most optimistic of moods I have to concur! Nevertheless as long as we stick to the basic principles, there are several combinations of candles that can come together and still be classed as an Evening Star. The following chart shows a variation that I would be happy to call an Evening Star, even though the market didn’t gap lower on the third day. The important message about the third session, surely, is where it finished? Even if the market didn’t gap lower at the start of this session, surely the selling that followed was enough to make you at least worry that things might be changing? The psychology of the third session of an Evening Star is all about how far the sellers took us back into the range of the first day, not where the first trade of the day may have been.

Figure 4-14: Diageo pic; daily candlestick chart; 9 May 2007 - 3 August 2007, showing variation on an Evening Star posted on 15, 18 and 19 June

When candle patterns collide

There’s something else that can be said about the Diageo chart shown in Figure 4-14. The second and third candles of the Evening Star also combine to form a variation on a Bearish Engulfing Pattern. Although the real body of the first candle (of the Engulfing Pattern, the middle candle of the Evening Star) wasn’t open, the next candle certainly satisfied any criteria for being classed as Engulfing. You may have noticed that I am sneaking into the text the idea of adopting some flexibility into the reading of the charts and the patterns. This is quite deliberate, although there are some observers (particularly the left brain people) who would strongly disagree with this blurring of the lines.

To those people I would ask the following question: in a real life situation would you want to ignore a big sell-off day at a high like the one we can see in the Diageo chart? This can be classed as an Evening Star, a Bearish Engulfing Pattern, a Tweezer Top or a Bearish Belt Hold Line to name but a few!

Maybe though, the point isn’t what we should call it, but what we would do about it in a live situation, and whichever way you look at it, it wasn’t the best of sessions for the bulls. It came right on a high, it was a big down day, and it didn’t take long for the market to start to confirm it subsequently. If you were long and you allowed the bearish candles to signal some lightening up of your position, you would have been delighted. If you had sold the market short after the formation of the pattern you would have only been showing a loss for a short period of time during the subsequent session.

Merging candles

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.

Figure 4-15: Three candles that make up an Evening Star, when merged together form a Shooting Star

Evening Star summary

An Evening Star is a powerful reversal pattern seen in a rising market. It is comprised of three candles. The first is a bullish day, the second is a Star with indecision rife despite the early promise. This indecision turns into outright bearishness on day three, which is why this is such a powerful reversal, and so closely watched by the Japanese.

You may have an idea where we’re going to go next on our trawl through the candlestick patterns. What happens when a Bullish Star formation is backed up by a strong day the next day? You’ve got it!