The morning star and evening star are the final two candlestick patterns to be examined.
In order to grasp the morning star pattern, it is important to comprehend two frequently observed price behaviours: gap up and gap-down openings.
A gap is a commonly observed stock movement wherein the closing price of one day differs from the opening price of the ensuing session.
Gap up the opening
A gap-up opening signals the enthusiasm of buyers to purchase stocks at a higher cost than the previous day’s close. An illustration of this is if ABC Ltd closed at Rs.100 on Monday and then revealed great quarterly results after the market shut, causing buyers to be willing to buy at any price on Tuesday morning.
This would result in a direct jump in the stock price to Rs.104 without any trading occurring between these two values. This identifies a gap up opening and indicates a bullish sentiment.
Gap down opening
A gap-down opening is indicative of the bears’ enthusiasm. In the previous example, if the quarterly results were bad, traders would be eager to sell off the stock at a price lower than Monday’s close. This means that Tuesday’s market could open directly at Rs.95 instead of Rs.100 – a plummet even though no trades occurred between these two prices. The following image has green arrows pointing to a gap-down opening, demonstrating bearish sentiment.
The Morning Star
The morning star is a bullish candlestick pattern with three days of activity. This pattern marks the end of a downward trend, as depicted in the chart circled below.
The morning star pattern consists of three candlesticks in a particular arrangement. It is highlighted in the chart above, and its rationale is described below.
Without P2’s doji/spinning top, it would have seemed that P1 and P3 established a bullish engulfing pattern.
For traders of both risk-taking and risk-averse preferences, the trade can be initiated on the 3rd day itself when patterns like the morning star emerge. Being patient for a confirmation on the 4th day is not required.
For a morning star pattern, the trade setup is as follows: