STARS

STARS

"One cannot be too cautious"

One group of fascinating reversal patterns is that which includes stars. A star is a small real body that gaps away from the large real body preceding it (see Exhibit 5.1). It is still a star as long as the star's real body does not overlap the prior real body. The color of the star is not important. Stars can occur at tops or at bottoms (sometimes a star during a downtrend is labeled a rain drop). If the star is a doji instead of a small real body, it is called a doji star (see Exhibit 5.2).

The star, especially the doji star, is a warning that the prior trend may be ending. The star's small real body represents a stalemate in the tug of war between the bulls and bears. In a strong uptrend, the bulls are in charge. With the emergence of a star after a long white candlestick in an uptrend, it is a signal of a shift from the buyers being in control to

a deadlock between the buying and selling forces. This deadlock may have occurred either because of a diminution in the buying force or an increase in the selling force. Either way, the star tells us the prior uptrend power has dissipated and the market is vulnerable to a setback.

The same is true, but in reverse, for a star in a downtrend. That is, if a star follows a long black candlestick in a downtrend, it reflects a change in the market environment. For example, during the downtrend the bears were in command but a change is seen in the advent of the star, which signals an environment in which the bulls and the bears are more in equilibrium. The downward energy has thus been cooled. This is not a favorable scenario for a continuation of the bear market.

The star is part of four reversal patterns including:

1. the evening star;

2. the morning star;

3. the doji star; and

4. the shooting star.

In any of these star patterns the real body of the star can be white or black.

THE MORNING STAR

The morning star is a bottom reversal pattern. Its name is derived because, like the morning star (the planet Mercury) that foretells the sunrise, it presages higher prices. It is comprised of a tall, black real body followed by a small real body which gaps lower. The third day is a white real body that moves well within the first period's black real body. This pattern is a signal that the bulls have seized control. I will break down this three-candlestick pattern into its components in order to understand the rationale behind this last statement.

The market is in a downtrend when we see a black real body. At this time the bears are in command. Then a small real body appears. This means sellers are losing the capacity to drive the market lower. The next day, the strong white real body proves that the bulls have taken over. An ideal morning star would have a gap before and after the middle line's real body (that is, the star). This second gap is rare, but lack of it does not seem to vitiate the power of this formation.

Exhibit 5.4 shows that a bullish morning star pattern developed during December 19 through 21. The rally that began with this pattern ran out of steam with the dark-cloud cover on December 26 and 27. Exhibit 5.5 shows that the October lows were made via a star (the small real body in the first week in October). The week after this star, the market had a strong white real body. This white real body completed the morning star pattern. The black candlestick after this white body formed a dark-cloud cover. The market then temporarily backed off. The morning star nonetheless became a major bottom. Exhibit 5.6 shows a variation on the morning star in which there is more than one star (in this case there are three "stars"). Note how the third small real body session (that is, the third star) was a hammer and a bullish engulfing line.