Morning Star

The Morning Star is a relatively common three-candlestick and rather powerful bullish reversal pattern.

The 2nd candlestick is the star itself. 

Its characteristics are as follows:

• The Morning Star must appear after a downtrend.

• The 1st candlestick must have a red body.

• The 2nd candlestick must form a gap down and it should ideally have a short green body.

• The 3rd candlestick should ideally form a gap up (not necessarily though) and have a long green body.

Such a pattern occurs after a downtrend, the day after losses happened, when prices open lower and form a gap with the close of the day before. They then close at almost the same level as they opened. The day after, prices open gap up and rise again to earn back most of what was lost on the 1st Japanese candlestick. This confirms the pattern and the major force is now bullish.

One has to note that the 2nd candlestick must form a gap with the 1st but that a gap between the 2nd and 3rd candlestick is preferable although not necessary. As for the body of the 2nd candlestick, the colour does not matter that much although green is best.

The wider the gaps, the more significant the pattern is. And the more losses the 3rd candlestick can erase, the more significant the pattern. Strong volumes on the 3rd candlestick can also confirm the pattern.

Regardless of the quality of the 1st gap and the star, it wiser to wait for the end of the pattern and the green body to appear before initiating any position. The Morning Star is a powerful pattern, it can give rise to buys on D+2 (D being the day of the star and D+1 the day of the green candlestick). The invalidation threshold can be placed either below the lowest point of the pattern, or below the 2nd gap if there happens to be one, and depending on the investment intentions of the stakeholder.

Moreover, it is interesting to observe reversal patterns together with support and resistance lines. A Morning Star can appear around a support and even go through it momentarily without invalidating it or giving rise to a bullish reversal.

Several versions of the Morning Star can be found. The Inverted Hammer is a less powerful one. There is also the Morning Star Doji which is a bit more powerful than a classic Morning Star and with a Doji as the star.