Morning Star Pattern

MORNING STAR (Sankawa Alee No Myojyo)

Description

The Morning Star signal is easy to recognize due to its symmetrical elements. It is visually apparent to the eye. The description of the signal in layman’s terms makes it easy to understand. It forms after an obvious downtrend. It is made by a long black body, usually fear induced at the bottom of a long decline. The following day gaps down. However, the magnitude of the trading range re­mains small for the day. This is the star of the formation. The third day is a white candle day representing the fact that the Bulls have now stepped in and seized control. If there is big volume during these days, it shows that the own­ership has dramatically changed hands The optimal Morning Star signal would have a gap before and after the star day.

Essentially, the Morning Star signal consists of the sellers wanting to get out at the bottom of a downtrend. The following day, the Bulls and the Bears get into an indecisive trading mode. The third day, the reversal of the previous bearish sentiment becomes obvious. A bullish candle, closing more than half­way up into the previous long black candle, reveals that the Bulls are now dominating.

The Morning Star pattern is named appropriately. Like the planet Mer­cury, the morning star, the Japanese say it foretells that brighter thing, sunrise, is about to occur. Or, prices are going to go higher. The makeup of the star, an indecision formation, can consist of a number of candle formations. The impor­tant factor is to witness the confirmation of the Bulls taking over the next day. That candle should consist of a closing that is at least halfway up the black candle of two days prior.

Criteria

1.    The down-trend has been apparent.

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

3.   The third day shows evidence that the bulls have stepped in. That candle should close at least halfway up the black candle.

Signal Enhancements

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

2.   The more indecision that the star day illustrates, the higher the probabilities of a reversal.

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

4.   A gap before and after the star day is even more desirable.

5.   The magnitude, that the third day comes up into the black candle of the first day indicates the strength of the reversal.

MORNINGSTAR DERIVATIVES

A Morning Star signal makes trend analysis easy. It clearly denotes a change in investor sentiment. Illustrated in the Dow Jones chart are a number of Morning Star signals. Occurring when stochastics, indicating oversold conditions, pro­duces a high probability result. An uptrend is about to occur. As with most candlestick “buy” signals, confirmation is usually required after the signal. What do we want to see after a candlestick buy signal? We want to see that the buyers are still participating. Notice the Morning Star signal that occurred in early August. The analysis of the signal is simplified when understanding what all the parameters are doing. Notice the first Morning Star signal that occurred in early August had stochastics not yet into the oversold condition. As men­tioned before, the signal is the most important factor. The stochastics are just a confirming indicator.

The fact that the following day, after the Morning Star signal was formed, did not reveal any follow-through buying will be analyzed different than if there had been another bullish trading day after the signal. The lower trading during the day would have revealed that the Bulls were not participating. This should have immediately suggested that the uptrend was not going to start immediately. The stochastics may have to get to a lower level.

(However, the Morning Star signal should have implied that the buyers were coming in at these levels. The bottom should be relatively near. The fact that another Morning Star signal formed over the next three days set the scenario for the same potential. There was a high probability that an uptrend may start. The continued buying the following day confirmed that the bullish sentiment was now in the mix.

The Morning Star formation merely requires the evidence of selling at the bottom, followed by an indecisive day, followed by strong buying that closes the trading more than halfway up the previous black candle.

As illustrated in Fig. 2-71, the AirTran Holdings Inc. chart, the third day was not a large body. The fact that it gapped up and then closed well above the black candle’s midway point provided the same information. The buyers had come back into this position with force. The fact that the reversal was occurring at a major moving average at the same time that the stochastics were in the oversold condition also provided credibility for this trade.

The more confirming indicators that can be added to the analysis, the higher the probabilities that a reversal has occurred and the greater the upside potential becomes. As viewed in fig. 2-72 (following page), the Renaissance RE holdings Ltd. chart, the Morning Star signal has a number of significant indica­tors. The large black candle, followed by a Bearish Engulfing signal, tells the candlestick investor to start watching for a buy signal. The gap-down of the indecision day is another indicator. Forming indecisive trading, right on a ma­jor moving average, is an additional reason to watch this trade. The gap-up and continued buying above the midway point of the large black candle has more credibility. And finally, all this occurring when the stochastics are in the over­sold condition makes this a very high probability trade.

Recognizing the Morning Star signal will produce substantial positive results for investors. Visually it incorporates commonsense analysis. Investor senti­ment has completely reversed. The implications reveal a Morning Star signal should always be heeded. The selling has exhausted. The Bulls and the Bears are in conflict. The buyers begin to control. Do not make it any more difficult than that.