What is a 'Morning Star'

A morning star candlestick pattern is seen by technical analysts as a bullish sign following a downward trend. The pattern consists of three candles and investors watch closely for it in order to capitalize on a trend reversal to the upside.

Breaking Down 'Morning Star'

A morning star candlestick pattern is comprised of three bars: the first bar is a tall red candlestick occurring within a well-defined downtrend; the second bar is a small red or white candle closing below the first tall red bar, and the third bar is a tall white candle with a price opening above the middle candle and closing approximately half way up the first bar.

Identifying a morning star pattern is important in recognizing the start of a trend reversal from bearish to bullish. It is one of many technical indicators used by technical analysts, which can also include oscillators such as the moving average convergence divergence (MACD). Investors look for confirmation on a chart to support their buy recommendations once they believe a morning star trend reversal is in its early stages.

An example of a morning star pattern occurred on June 16, 2016 for Coromandel International's stock. The company closed down that day,  forming an extended bearish candle. The stock created a doji candlestick the following day, indicating to investors a measure of uncertainty in terms of which way the stock price would next move. The stock price surged on the third day, creating a long bullish bar, and completing the morning star pattern of three telltale bars.

Candlestick patterns date back to Japanese merchants eager to detect trading patterns for their rice harvests. Studying these ancient patterns became popular in the 1990s in the US with the advent of internet day trading. Investors analyzed historical stock charts eager to discover new patterns for use when recommending trades. Reversal patterns are critically important for investors to identity and there are several other commonly used candlestick charting patterns. The doji and the engulfing pattern are all used to predict an imminent bearish reversal.

Morning Star Analysis and Fundamental Analysis

Technical traders are focused on chart trends in playing both sides of a stock’s price movement. Candlestick patterns such as the morning star are important in helping them identify emerging trend shifts. Technical analysis stands in contrast to fundamental analysis, which is also important when contemplating investment strategies. Investors commonly use fundamental analysis when looking to buy and hold a particular company. Fundamental analysis focuses on the company’s financial health and prospects. These typically include what products and services are in development as well as the company’s market position versus its competition. Companies well positioned within emerging growth areas that pay regular dividends can be especially attractive to long-term investors.

 

 

 

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