What Is The Morning Star Candlestick Pattern?
The morning star candlestick pattern is a bullish candlestick pattern which evolves over a three day period. The pattern got the name because just like the planet mercury, which is the star of early morning i.e. it appears just before the sun rise, this pattern appears just before a potential rise in the price.
Formation Of The Morning Star Candlestick Pattern
The morning star pattern appears at the bottom end of a down trend. The pattern is formed by combining three consecutive candlesticks. The first candle is a bearish candle, second candle is indecisive in nature and third candle is bullish in nature. The second candle should generally be either a doji or a spinning top candlestick. The morning star pattern signals a reversal in the trend, from bearish to bullish.
Psychology Behind The Morning Star Pattern
- During a down trend, the market keeps falling making new lows.
- Day one (or any specific time period) of the morning star pattern, as expected the market makes a new low and forms a long red/bearish candle.
- Day Two: The bears show dominance with a gap down opening. However, bulls start accumulating at the low point. At the end of the session price closes either just below or above the opening price, resulting in the formation of either a doji or a spinning top candlestick. The presence of a doji or spinning top represents indecision in the market.
- The occurrence of a doji or a spinning top on day two causes jitters within the bears, as they would have otherwise expected another down day especially in the backdrop of a promising gap down opening.
- Day Three: As a result of nervous bears who look to cover their shorts and due to profit booking or renewed buying interest, the price opens with a gap up. The aggressive buying interest takes the price higher and at the end of the session closes above the opening price of day one forming a long green/bullish candle.
- One should look to buy at this point, as the price is expected to go higher for nest few trading sessions.
Significance Of The Morning Star Pattern
The ‘morning star’ candlestick pattern is effective in a downward trending market and signals bullish trend reversal on the charts.
The significance of the pattern increases if the third day’s opening is below a support area and close is above the support area. If the third candle is a bullish marubozu or candle with no upper or lower shadow, it speaks of the more bullishness. Its importance is even more if it is accompanied by increased volume.
* Counter part of this pattern in a candle chart is the Evening Star candlestick pattern.