What is a Bond?
A bond is usually the least risky investment availible. It is also the investment with the lowest returns. Most people look to bonds as a instrument which gives modest but reliable returns. Bonds in the simplest sense are loans that individuals give to companies and governments. Therefore, the amount of risk and reward is linked to the credibility of the bond seller. If GM were to sell bonds at 18% interest the day before the bankruptcy, it is unlikely anyone would buy them despite the large returns. When a bond seller cannot repay a bond that has matured, the holder of the bond loses the entire investment.
Today there are several patterns which are to be discussed. These patterns all belong to the same family. I will be covering the entire “star” family of candlestick patterns, except for one which will be covered later. Anyways, on with what will be this blogs biggest post to date.
The pattern that we are going to cover first is known as the Morning Star. This pattern shows up at the bottom of downward trends. It works because it shocks the market with a sudden change in direction. The Morning Star, and it’s counterpart the Evening Star have three candles that make up the formation.
1. A long candle that is in the direction of the trend. Large red candle in the case of the morning star.
2. A gap in the direction of the trend and a candle with a small body (Spinning Top).
3. A gap against the trend and a long candle that is against the current trend which pushes well into the first candles territory.
If my descriptions are too confusing fear not, as always I have prepared pictures. Below is an example of the Morning Star candlestick pattern.
As previously explained, the morning star pattern occurs during a down trend, and is strongest when the last candle is accompanied by heavy volume. Large gaps between the real bodies of the pattern also help to increase the likelihood of a reversal.
The picture above shows the ideal Evening Star candlestick pattern. This pattern, like the Morning Star pattern is situational. The Evening Star pattern should appear during a strong up trend. Another factor which can strengthen the pattern is if the second candle is also a hanging man or hammer.
Here are two charts that show the Morning Star and Evening Star in use.
Morning Star Chart
Evening Star Chart
Variations of the Morning/Evening Star
Several variations of the Morning Star and Evening Star patterns exist. These variations are stronger and rarer than the original candlestick pattern. The first variation is the Morning Doji Star and the Evening Doji Star. This candlestick pattern is exactly the same as the original except that the second day is a Doji instead of a small bodied candlestick.
Below is a diagram which clearly shows the difference between the original and the Doji variation.
As shown above, this pattern involves a Doji which strengthens the pattern because the Doji by itself is considered a reversal pattern.
Morning Doji Star Chart
Evening Doji Star Chart
Abandoned Baby Top and Abandoned Baby Bottom
The next variation of the Morning Star candlestick pattern is the Abandoned Baby pattern. This pattern is the strongest of all the Star patterns and it is also the most rare. This pattern involves very large gaps between the second day and the other two candlesticks. This candlestick pattern demands serious attention and consideration whenever it occurs, it is very rare for this pattern to fail.
Below is a diagram which show what the Abandoned Baby Top and Bottom look like.
As illustrated the most important trait of the abandoned baby is the large gap that must occur. The shadows of the second candles cannot overlap the shadows of the other two, otherwise it becomes the Doji Star pattern instead. It is also important to not that the second day does NOT have to be a Doji to validate the pattern.
Abandoned Baby Top Chart
Abandoned Baby Bottom Chart
I hope you have gained some insight about the use of the Star type patterns by reading this article. Always remember to use stop losses and trade responsibly.
All pictures are credited to Steve Nison, author of Japanese Candlestick Charting Techniques 2nd Ed.
The Eight steps to economic recovery are…
1. Government increases spending. CHECK!
2. Stock market rises. CHECK!
3. Bond yields rise. CHECK!
4. Consumer spending stops falling or begins to rise. Sort of CHECK!
5. Housing market begins to recover.
7. Interest rates increase.
8. Unemployment returns to normal.
This is what the consumer price index looks like right now.
Here is the 12-month percent change for the Consumer Price Index.
As you can see there is plenty of room for improvement in the consumer spending area. Only time will change consumer expectations about the market so that spending can increase.
