Morning Star: Implications in Different Market Scenarios

In the domain of Japanese candlestick charting, the configuration of a morning star presents three distinct candlesticks:

• The first candle features a lengthy red or black body with a minimal or absent lower shadow.
• The second candle has a small body size. Ideally, it should open lower than the closing price of the first candlestick. This suggests that the previous downtrend is persisting but losing steam. The body of this candle can be either green or red.
• The concluding candle is a bullish one, characterized by a long green or white body with minimal or no lower wick. Ideally, this candlestick should open at a price higher than the second candlestick's closing price and close deep within the first candlestick's body, thereby indicating a possible bullish reversal.

1. Trend-Driven Market vs. Sideways Action

The appearance of a morning star following the advanced stage of a downtrend suggests a possible shift in market direction.

A central aspect of the morning star is determining its position within the context of the ongoing downtrend. The image below underscores this point by illustrating that a morning star pattern emerging after a significant downward move may indicate a market bottom. Conversely, if this pattern appears early in a decline, the probability of it marking the bottom is reduced.

Optimal Entry Points After the Emergence of a Morning Star

In sideways trading conditions, a morning star usually holds no significance. Yet, if it emerges near the lower boundary of a broad trading range, it could signal a potential shift back to the range's upper limit.

2. Variations of a Morning Star

The illustrations and criteria provided above showcase the classic or textbook version of the morning star pattern. However, it's important to note that in actual trading scenarios, suboptimal versions of this pattern can also be relevant, depending on specific market conditions.

Common variations of the morning star pattern include configurations where:

1. The Second Candle (Star) Does Not Gap: You're likely to encounter this formation in shorter charting timeframes (like hours or minutes) and in markets with low volatility. In such cases, it's advisable to wait for additional signs of an upward trend before opening a position.
2. The Third Candle Has a Small Green/White Body: In such instances, verify that the third session closes significantly within the body of the first. If not, it would be wise to wait for additional validation before proceeding.
3. The Third Candle Closes Above the First: This scenario often occurs after downward trends that are either long-standing or have reached a mature phase. The prominent green candle signals a change in market sentiment, potentially marking the beginning of a new bull market.

3 Support/Resistance Zones

A morning star appearing within a support zone gains additional significance for several reasons:

1. Confirmation of Critical Zones: Support areas serve as barriers where the price has struggled to break lower in the past. The presence of a morning star near those zones adds credibility to their importance.
2. Strengthened Reversal Indicator: A morning star forming within a support zone heightens the likelihood of an upward reversal, signaling a strong refusal to push prices lower and the potential onset of a bullish trend.

Put simply, a morning star serves to confirm or strengthen a support zone and increases the probability of a bottom reversal.

Be aware that the morning star itself creates a support zone.

4. Additional Candlestick Patterns

When additional bullish reversal patterns are spotted near the price range of a morning star, such overlapping signals can provide a more robust hint at a potential shift in price direction.