The evening star is the bearish counterpart of the morning star pattern. It is aptly named because the evening star (the planet Venus) appears just before darkness sets in. Since the evening star is a top reversal it should be acted on if it arises after an uptrend. Three lines compose the evening star (see Exhibit 5.7).
The first two lines are a long, white real body followed by a star. The star is the first hint of a top. The third line corroborates a top and completes the three-line pattern of the evening star. The third line is a black real body that moves sharply into the first periods white real body. I like to compare the evening star pattern to a traffic light. The traffic light goes from green (the bullish white real body) to yellow (the star’s warning signal) to red (the black real body confirms the prior trend has stopped).
In principle, an evening star should have a gap between the first and second real bodies and then another gap between the second and third real bodies.’ However, from my experience this second gap is rarely seen and is not necessary for the success of this pattern. The main concern should be the extent of the intrusion of the third day’s black real body into the first day’s white real body.
At first glance Exhibit 5.7 is like an island top reversal as used by Western technicians. Analyzing the evening star more closely shows it furnishes a reversal signal not available with an island top (see Exhibit 5.8). For an island top, the low of session 2 has to be above the highs of sessions 1 and 3. However, the evening star only requires the low of the real body 2 to be above the high of real body 1 to be a reversal signal.
The evening star pattern shown in Exhibit 5.9 reflects the Summer of 1987 which called the high of the Dow just before the crash. (I wonder if the Japanese technicians who use candlesticks were looking at this!)
Exhibit 5.10 provides an example of how candlestick indicators can transmit a reversal signal not easily found with Western tools. The last hour on September 5 and the first two hours the next day formed an evening star pattern. The star portion of this evening star pattern would not have been an island top based on the aforementioned discussion. In
this instance, candlesticks provided a top reversal indication not available with the Western island top. Also note how the rally that ended with this evening star began with the morning star on September 4.
Although more important after an uptrend, the evening star can be important at the top of a congestion band if it confirms another bearish signal. (See Exhibit 5.11.) That is what happened in the middle of April. The star portion (that is, the second day) of the evening star coincided with a resistance area. The basis for this resistance at $413 was that it was an old support level from late March. Old support often converts to new resistance. Try to remember this! It is a very useful trading rule.
the resistance level near $413 coincided with the appearance of the evening star thus reinforcing the negativeness of the pattern.
Exhibit 5.12 shows a well-defined evening star in mid-December. The star was preceded by a strong, white real body and followed by a weak, black real body. A variation of an evening star appeared in mid-November. The reason it was a variation is that the evening star usually has a long, white real body preceding the star, and then a black real body after the star. We did not see the long, white or black real body lines here. We view this as a top, however, not only because of its minor resemblance to an evening star pattern, but because of the hanging-man line on November 21 (the “star” portion of the evening star). The next day’s opening under the hanging man’s real body confirmed a top.
Some factors that would increase the likelihood that an evening or morning star could be a reversal would include: