Evening Star Signal
The Evening Star signal is found at the top of an uptrend. Like the evening star Venus, which foretells of gloomy things (night) to come, this signal too suggests that bad things (lower stock prices) could be on the way.
In order for the Evening Star signal to be valid, the following conditions must exist:
The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart.
The first day of the signal must be a long white body. The second day must be a day of indecision. The third day should be a long dark candle reaching down at least halfway into the body of the first day’s white candle.
The following Figure shows an Evening Star formation. It is also a 3-day reversal signal. The bulls are in complete control on the first day. Then the bears step in. Supply meets equal demand giving rise to an indecisive candle. The third day shows the supply is far greater than the demand can absorb. The bears will ride the trend down with probability on their side. Please pay close attention to the half way criteria mentioned above. Just like the Morning Star signal, the Evening Star signal has a few variations depending on the second day's candle.
Notice the Evening Star formation in the chart of OSI Pharmaceuticals, Inc. The middle day shows a long legged Doji. If a Doji means indecision, then a long legged Doji signifies great indecision. The fact that the third day produced a long black candle gives conclusion to that indecision in the favor of the bears. It would be an excellent time to short sell the stock the day after the signal.
Chart courtesy stockcharts.com
Notice the Evening Star formation in ACC. The middle day, though not a Doji, was still a small bodied day. The dramatic change in investor sentiment from bullish on the first day, to neutral on the second and to bearish on the third tells the trader that bears have assumed control. Short position can be established once the signal is confirmed with a lower close.
Chart courtesy icharts.in