Evening Star

The evening star is a major bearish reversal pattern that is relatively common and is composed of three candlesticks.

The second candlestick is the actual star.

The elements that characterise an evening star are as following:

• The evening star must appear after an upward trend.

• The 1st candlestick must have a green body.

• The 2nd candlestick must draw a bullish gap; ideally it has a small red body.

• The 3rd candlestick ideally (however this is not mandatory) draws a bearish gap and has a big red body.

Such a structure occurs after a bullish trend, usually the day after gains were made; prices open on the upside by forming a gap in comparison with the previous day’s closing price. The following day, prices open in a bearish gap and fall enough to erase a considerable part of the earning made by the 1st candlestick.

This confirms the structure and the dominating influence now comes from the bears. The gap went from being bullish to bearish and the shadows of the three Japanese candlesticks do not become covered. It is a rather rare and powerful pattern. In western technical analysis, they call it an « island of inversion ».

It is necessary to note that the 2nd candlestick must inevitably form a gap with the 1st but that between the 2nd and the 3rd candlestick, the gap is preferable but not mandatory. As for the body of the 2nd candlestick, colour does not really matter although red remains ideal.

The larger the gaps are, the more significant the pattern is. In addition, the more candlestick 3 erases the earnings of candlestick 1, the more significant the pattern will be. Strong volumes on the 3rd candlestick will also further confirm the pattern.

No matter how good the quality of the 1st gap and of the star are, it is better to wait for the end of the pattern and that the red body forms before taking a position. As the evening star is a powerful pattern, it will be able to justify leveraged sales in day+2 (day+0 being the day of the star and day+1 that of the red candlestick).

The threshold of nullification can be placed either above the high formed by the structure or above the second gap if it took place depending to the investment horizon.

On the other hand it is interesting to combine the observation of the reversal patterns with the support and resistance lines. An evening star will sometimes be able to form at the level of a resistance line and perhaps cross it momentarily without invalidating it, therefore leading to a bearish reversal.

The evening star has variants. The shooting star is a less powerful version of this. There is also the evening doji star, which it is a little more powerful than the original evening star, where the star is constituted by a doji.