Morning Star Candlestick Pattern and Gap Analysis To Maximise Your Profits

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. 

The Gaps

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.

1. The market is being strongly driven downwards, firmly residing in the control of bears. Continually setting new lows, it’s clear that this downtrend isn’t letting up.

2. At the beginning of P1, the market made a new low and formed a long red candle, indicating an increase in selling pressure.

3. On day 2 of the pattern, the bears display their strength with a gap-down opening, further demonstrating their authority.

4. After the gap-down opening, there is little movement throughout the day, which results in either a doji or a spinning top being formed. This signals uncertainty in the market.

5. The emergence of a doji/spinning creates a feeling of uneasiness among the bears, particularly considering the potential for another negative day after seeing a promising gap down at the start of trading.

6. On the third day of the pattern, the market/stock opens with a gap and is then followed by a blue candle that closes higher than where P1’s red candle opened.

Without P2’s doji/spinning top, it would have seemed that P1 and P3 established a bullish engulfing pattern.

8. P3 is the stage where it all happens. On the gap-up launch, bears will be quite tense. With the momentum from the opening gap, buying continued throughout the day, enough to erase all of P1’s losses.

9. It appears likely that bullishness on P3 will persist over the next few trading sessions, making now a good time to consider buying.

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: 

1. Start a long position at the end of P3 (at around 3:20 PM) after verifying that the 3 candlesticks, P1, P2, and P3, constitute a morning star.

2. To corroborate the emergence of a morning star on P3, these criteria must be met:

1. P1 should be a red candle

2. At the start of trading, P2 may display a doji or spinning top formation.

3. P3 is anticipated to open with a gap up, while the market rate at 3:20 PM will be greater than the P1 opening.

3. The lowest point in the pattern would serve as the stopping point for the transaction.