Evening Star Candlestick Pattern
An Evening Star candlestick pattern is a very strong bearish reversal candlestick pattern. There are even a few different types of Evening Star candlestick patterns Evening Doji Stars, Shooting Stars and Abandoned Baby Tops are all different types of Evening Star candlestick patterns.
All Evening Star candlestick patterns are considered extremely bearish reversal patterns. However, some specific ones, like an Abandoned Baby Top candlestick pattern, send an even stronger bearish reversal signal than other Evening Star candlestick patterns.
Evening Star candlestick patterns consist of a 3 candlestick group. This group of candlesticks develop at the top of uptrends. This candlestick pattern is usually a signal of a major trend change for the price. The uptrend that the price was in just changed trend and turned into a downtrend. Beware of the reversal powers of Evening Star candlestick patterns.
From a trading perspective, the stock’s share price continues its ascent and bullish investors appear to be in full control. The previous candlestick was a bullish, long green candlestick. This is the 1st candlestick in the set of 3 required for an Evening Star candlestick pattern.
At the open of the next trading session, bullish investors are feeling confident as the share price tends to gap-up from the previous candlestick’s real body. This bullish euphoria continues through the early part of the trading session. But at some point during the trading session, bearish investors stage a selling rally and the share price starts falling again. This can be due to new short positions being taken. It can also be due to normal profit taking at the top of a long uptrend and gap-up.
While bullish investors keep the price off its low from the trading session by its close, bearish investors have definitely gained the upper hand. This is the 2nd candlestick in a series of 3 for the Evening Star candlestick pattern.
The Evening Star candlestick pattern is confirmed during the third trading session. Bearish investors continue their rally that started during the 2nd trading session. This causes a bearish long red-colored candlestick to develop by the end of the trading session. This is 3rd and final candlestick for a fully completed Evening Star candlestick pattern.
Requirements
The following are the requirements are similar for an Evening Star candlestick pattern. This pattern, first and foremost, must develop at the top of a long, established uptrend. The Evening Star candlestick pattern is made up of a group of 3 consecutive candlesticks. Here are some additional requirements.
- The 1st candlestick is a bullish candlestick that has a long, green colored real body
- the 1st candlestick tends to leave a medium-length upper shadow
- the 1st candlestick tends to leave a medium-length upper shadow
- The 2nd candlestick is also green colored
- The real body of the 2nd candlestick is quite a bit smaller than the 1st candlestick’s real body
- The 2nd candlestick opens higher than the 1st candlestick’s real body
- The real bodies from the 1st & 2nd candlesticks should not touch
- The real body of the 2nd candlestick is quite a bit smaller than the 1st candlestick’s real body
- The 3rd candlestick has a red colored real body since it is a bearish candlestick
- The real body of 3rd candlestick must penetrate low into the real body of the 1st candlestick
- The real bodies of the 2nd and 3rd candlesticks should not touch
- The 3rd candlestick pattern typically starts with a gap-down in the morning
- The real body of 3rd candlestick must penetrate low into the real body of the 1st candlestick
Abandoned Baby Top Requirements
Here are the specific requirements for an Abandoned Baby Top candlestick pattern. This pattern is not a very common pattern that develops, but pay attention when it does. The uptrend is[s2If !current_user_can(access_s2member_level1)]…..
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- An Abandoned Baby Top candlestick pattern has a Rising Window candlestick pattern (gap-up) between the 1st & 2nd candlesticks
- An Abandoned Baby Top candlestick pattern has a Falling Window candlestick pattern (gap-down) between the 2nd & 3rd candlesticks
Characteristics & Observations
Listed below are some of the other characteristics for not only Evening Star candlestick patterns, but also Abandoned Baby Tops and Evening Doji Stars. I’ve also include some of my personal observations for certain patterns.
- The longer and more established that uptrends are that lead up to Evening Star candlestick patterns, the greater the chance that the share price will experience a major trend reversal
- Evening Star and Evening Doji Star candlestick patterns that develop on heavier than normal selling volume are not only major trend reversal signals, but they also provide extremely stiff resistance during any subsequent attempts to break through the resistance areas
- When the 2nd candlestick’s real body is contained within the upper shadow from the 1st candlestick, there tends to be a stronger chance for the uptrend to reverse into a strong and quick downtrend
- Watch how far the 3rd candlestick pattern penetrates into the 1st candlestick’s real body
- the lower 3rd candlestick’s real body penetrates 1st candlestick’s real body, the more bearish the reversal pattern tends to be
- the lower 3rd candlestick’s real body penetrates 1st candlestick’s real body, the more bearish the reversal pattern tends to be
Resistance Area
The very top of an Evening Star candlestick pattern is the resistance area. This resistance area is the same for most types of Evening Star candlesticks, including Shooting Stars and Evening Doji Star candlesticks.
As with any type of resistance area, whether it’s from a trendline, a moving average line or a candlestick pattern, a resistance area is negated when a stock or index’s share price closes above the resistance area. In order to negate the resistance areas from these candlestick patterns, a subsequent candlestick must close above the top of the candlestick’s upper shadow.
In order to accomplish this, the price will typically need to see a trading period that includes extremely heavy buying volume. This heavy buying volume is needed to not only break through the overhead resistance area, but to also close above it and negate its effects. Since Evening Star candlestick patterns are possible major top reversal patterns, it may be a while before the price even gets a chance to re-test the resistance area. Something to keep in mind when scaling out of a long position.
Bullish Counter-Part
The bullish counter-part to an Evening Star candlestick pattern is a Morning Star candlestick pattern. The bullish counter-part to an Evening Doji Star candlestick pattern is a Morning Doji Star candlestick pattern. The bullish counter-part to an Abandoned Baby Top candlestick pattern is an Abandoned Baby Bottom candlestick pattern.
Every bearish candlestick pattern has a bullish counter-part. Always. No matter what the candlestick pattern is. The Japanese are very big into balance of all things.
The main difference between an Evening Star candlestick pattern and a Morning Star candlestick pattern is where the pattern develops in a trend. Evening Star candlesticks patterns develop at the top of uptrends. Evening Star candlestick patterns are considered bearish reversal candlestick patterns. These patterns suggest a reversal for the price from an established uptrend to a new downtrend.
All Morning Star candlestick patterns, the bullish counter-parts to Evening Star candlestick patterns, develop at the bottom of established downtrends. Morning Star candlestick patterns are considered bullish reversal candlestick patterns. These patterns suggest a reversal for the price from an established downtrend to a new possible uptrend.
Trading Strategies
I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price.
Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.
If You Are Currently Long the Stock
You may have noticed other sell signals flashing before the development of the Evening Star candlestick pattern. Maybe it was the Doji at the top of an uptrend that tipped you off. If you did notice some early sell signals and already scaled-out of some shares, congratulations!
If that is not the case and you are still holding all your shares, you will want to begin a scale-out process. Use the very first re-test of the resistance area as an opportunity to make a scale-out sale. If the re-test of the resistance area fails, as it usually does on the first re-test, another scale-out sale could be made. That would leave you with about 1/3 of your holdings left.
I usually prefer to use a 3 step scale-out process. With Evening Star candlestick patterns, you can be more aggressive and use a 2 step scale-out process. Especially when the candlestick pattern develops on volume that is significantly above average. Downtrends that follow most Evening Star candlestick patterns tend to be relentlessly bearish and last a lot longer than most investors anticipate.
One thing to keep in mind is the scale of the chart where you see the Evening Star candlestick develop. Is it on a daily chart? Is it a monthly chart? The scale of the chart will then help to determine the speed in which your selling actions need to take place.
For example, if you notice an Evening Star candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When an Evening Star candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.
It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.
If You Are Looking to Short the Stock
Normally I recommend waiting for for the re-test before entering into a short position. That is not the case with an Abandoned Baby Top candlestick pattern. This rare, but powerful bearish reversal candlestick pattern is one of the few candlestick patterns I would feel more comfortable taking a short position on. If all the above requirements are met, initiate the short sale process on the start of the next candlestick after an Evening Star candlestick. Wait for a drift upwards in price and then make the first portion of your short sale.
If you are lucky enough to be watching a stock while the 3rd candlestick in an Abandoned Baby Top candlestick pattern is developing, even better. Start building the short position with a short sale made during the development of the 3rd candlestick.
For regular Evening Star candlestick patterns, I recommend like most other candlestick patterns that you wait for a re-test and failure of the resistance area before initiating a short position.
To help your short sale chances for success, ensure the selling volume and selling momentum are both increasing. A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum after the development of the Evening Star candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.
Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.
In order to minimize risk on a short position, only enter into a short sale trade after capitulating buying volume takes place. Look for a Climax Top volume spike. A capitulating volume spike helps to confirm the bearishness of an Evening Star candlestick pattern.
Stop-Loss on Short Sale
To try and further minimize risk, a stop-loss order should be used on all short trading strategies. For a Evening Star candlestick pattern, place the stop-loss order in 1 of 2 places:
- at the resistance area from the pattern as described above
- place a tighter stop-loss order at the bottom of the lower shadow of the 2nd candlestick in an Evening Star candlestick pattern
After forming the 3rd candlestick in the candlestick pattern, any meaningful downtrend will probably continue the bearish momentum of the 3rd candlestick. Look for the selling volume to start increasing along with an increase in selling momentum as indicated by the MACD Histogram chart tool.
Real Chart Examples
This 1 year daily candlestick chart for Goldcorp Inc. (GG). This is not the typical “at the top of the uptrend” bearish reversal signal. Instead, this candlestick illustrates an Evening Star candlestick pattern that prevented any attempt at a rebound back towards the previous high. It kept the downtrend going instead.
This Evening Star Candlestick Pattern for Goldcorp Inc. (GG) Prevented Any Attempt at a Rebound Rally
Notice how other than within the first couple of days, there has been no re-test of the resistance area. That is why s rather fast scale-out strategy is typically needed after the development of an Evening Star candlestick pattern.
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