The following chart demonstrates a Morning Star signal in JCP. It is very easy to see the change in investor psychology at that particular point. Also helping the reversal, were the stochastics which were oversold. Notice where the signal was formed. Could a trader have been anticipating a reversal at that point? Possibly.
The gap support near the end of February held up. This added to the weight of the reversal.
Morning Star Signal
The Morning Star signal is found at the bottom of a downtrend. Like the morning star Mercury, which foretells of good things (morning) to come, this signal too suggests that good things (higher stock prices) could be on the way.
In order for the Morning Star signal to be valid, the following conditions must exist:
The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
The first day of the signal must be a long dark body. The second day must be a day of indecision. The third day should be a long white candle reaching at least halfway into the body of the first day’s dark candle.
The following Figure shows an ideal Morning Star formation. There can be other variations of this signal. Traders can visually see the investment sentiment turning around in the stock. On the first day of the signal the bears are in complete control. Then on the second day, there is indecisiveness. The bears and the bulls are at equilibrium. The third day proclaims victory for the bulls. Again, the half way point criteria for the third candle is very important and traders should pay attention to it.
Chart courtesy stockcharts.com
Chart courtesy icharts.in
The following chart demonstrates a Morning Star signal in WIPRO. A small downtrend that started with a Bearish Engulfing signal led the stock down towards the 660 area. Stochastics were oversold by this time. A Morning Star signal in these conditions should have told the traders that the downtrend is possibly over.