How to Identify an Evening Star
“Evening Star” is commonly used to refer to the planet Venus when it appears in the western sky after sunset. It signifies the end of the day and the beginning of the night.
In technical analysis, an evening star pattern typically occurs at the end of an uptrend, suggesting a potential trend reversal from bullish to bearish.
This week we’ll walk you through the evening star candlestick pattern.
What is an evening star?
An evening star is a three-candlestick bearish reversal pattern that appears at the end of an uptrend. It is the opposite of the morning star pattern and involves a few key elements.
The pattern consists of a long-bodied bullish candle, followed by the “star” candle gapping up on the open and a decisive long-bodied bearish candle.
The last candle gaps down on the open and closes well into the first candle’s body, suggesting a potential trend reversal from bullish to bearish.
How does an evening star occur?
An evening star occurs in an uptrend after a period of bullishness, where a potential market top might take shape.
The first candle of the pattern closes well above the opening price, showing strong buying pressure in the market.
The second candle opens with a gap up but closes basically flat. It is the first sign of weakness as buyers fail to push the price much higher.
The weakness could be confirmed if the third candle gaps down on the open and closes well into the first candle’s body. This suggests bears have taken over and a potential trend reversal might be on the horizon.
How to identify an evening star?
Traders might consider the following factors when trying to spot an evening star pattern.
● Uptrend
The first step is to look for an uptrend, where a potential market top might occur.
● The first candle
The pattern’s first candle should be a long-bodied bullish candle.
● The second candle
The second candle should be a small-bodied candle, either bullish or bearish, with a gap up on the open. It is worth noting that the pattern’s high typically occurs on the second candle, the “star” candle.
● The third candle
The third candle should be a long-bodied bearish candle that gaps down on the open and closes below 50% of the first candle’s body.
● Volume
An increase in trading volume on the third candle could make the pattern more reliable.
Case study
The chart below shows the evening star pattern of PepsiCo, Inc. (NASDAQ: PEP) formed on a daily chart.
The stock had been advancing before the evening star showed up.
On the first day of the pattern, the price rose significantly, closing the session with a long-bodied bullish candle.
On the next day, the price opened higher than the previous high and advanced further. However, the bulls failed to hold their ground with the price closing just above the open, forming a small-bodied candle.
On the third day, the price opened with a gap down and declined far below the midpoint of the first candle’s body. Thus, the evening star pattern was completed.
Summary
The evening star is a three-candlestick bearish reversal pattern formed at a potential market top.
The pattern might help traders with long positions spot a potential exit point or signal a potential entry point for short sellers.
When trading candlestick patterns, investors should not forget to factor in other technical methods.
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Read more
