All technical traders, whether classically trained in Western technical analysis or Eastern technical analysis, look for specific patterns that can define pivot points or key reversals within a market.
Many Eastern market technicians utilize the patterns provided through Japanese candlesticks as a viable means to look for pivot points in the market. These patterns include the engulfing bullish and piercing line patterns, as well as a pattern known as the “Three River Morning Star” as an indication that a market is changing direction and sentiment, is moving from bearish to bullish.
According to Investopedia, the “Morning Star” is a bullish candlestick pattern that consists of three candlesticks. The first bar is a large red candlestick located within a defined downtrend while the second bar is a small-bodied candle (either red or white) that closes below the first red bar. The last bar is a large white candle that opens above the middle candle and closes near the center of the first bar's body.
The morning star is signaling a change in trend from bearish to bullish. Traders use it as an early indication that the downtrend is about to reverse. A morning star pattern can be useful in determining trend changes, particularly when used in conjunction with other technical indicators. Many traders also use price oscillators such as the moving average convergence divergence (MACD) and relative strength index (RSI) to confirm the reversal.
In the case of today’s identification of this pattern type, it met all the requirements for each of the three necessary to form the pattern. Furthermore, the pattern was identified after a downtrend (shallow as it may be). Lastly, this pattern was recognized at the 23% retracement of the most recent rally.
Typically, one will wait until the next day for this candlestick pattern to confirm its existence. Confirmation for this bullish candle pattern requires that the following trading day opens above the lows of yesterday’s candle and closes above the highs of yesterday’s candle. The more extensive the range between the open and closing price of the confirming candle, the more likely you are to find strength and reliability based off of this pattern.
Wishing you as always, good trading,