How to use Morning and Evening Stars to make money in stock market

Morning Star and Evening Star are two candlestick patterns that symbolize major trend reversal ahead that can shift the market sentiment. The Morning Star is considered as a positive indicator, whereas Evening Star denotes a negative turnaround.

Avdhut Bagkar | Business Standard
24th April

Morning Star This candlestick pattern involves three candles with a long body red candle, followed by a small body green candle showing possible turnaround which receives confirmation from the next long green body candle. The small green candle in the middle is the day where the market shows indecision and uncertainty, which turns into a positive sentiment with the immediate green candle. The support levels can be established considering the lows of either of the two green candles. CLICK HERE FOR THE CHART (Drreddy chart)

Evening Star This formation is the opposite of a Morning Star. Herein, a long body green candle comes first, followed by a small red candle and the next is a long body red candle. This formation indicates that the selling pressure is growing stronger and the price is set to fall in the coming sessions. This pattern boosts the sentiment of short sellers which increases with rise in volumes as price starts to correct deeply.

Significance of these two stars Major indicators of trend reversals

The volumes on the reversal candle helps identify the possible rise that counter may witness in coming sessions

The low of the reversal candle becomes the stop loss for the trend

These candlestick patterns can drive price alone without any support from other indicators

Additional indicators to confirm trend more accurately Technical indicators like Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) assist these formations by making positive crossover or strongly showing reversal with turnaround in their moving averages.

While on reversal, if the long green body crosses the trendline resistance, then the underneath strength becomes stronger.

The continuation of a trend grows firmer when the counter or index witnesses gaps. In morning star, one can see a gap up close and in Evening Star a gap down close.

It's difficult to spot these candlestick patterns in a trending market. However, when the market is consolidating or highly volatile, such formations can ably assist in identifying trend reversals in advance. Stocks with such reversal patterns have seen a stable surge from a medium-term perspective.

If the long body green candle in morning star logs a high above the long red candle, the trend is indicating that the buyers are absorbing selling pressure emerging at higher levels. Similarly, the formation of Morning star pattern may have a “small red body” instead of a small green body. In such instances, the confirmation depends on the close of an immediate candle after the long body green candle. This candle needs to close aggressively on a positive note.

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The analysis has been done by a Business Standard reporter who is a certified technical analyst. The analysis does not represent the views of Kotak Securities.

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