As traders, we use technincal analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Anyalysis in simple terms is the study of historic price movements in a chart in search of patterns or consistantly traded support and resistance levels. Today we are looking at a specific chart pattern that falls under reversal patterns, the Evening Star.
Appearance: An Evening Star is comprised of:
- A strong bullish day where the open is near the bottom of the day’s trading range, and the close is near the high of the day’s trading range.
- The bullish day is followed by a Tombstone Doji which has both the open and close at the bottom of the day’s trading range.
- The Tombstone Doji is followed by a strong bearish day where the open is near the high of the day’s trading range, and the close is near the low of the day’s trading range.
Bearish Reversal Pattern: The Evening star is one of the most reliable bearish reversal patterns. You can see the price moves higher, is followed by a strong retracement, and then is confirmed by selling. The stock should continue lower once the pattern is complete.
Important Note: Be aware, this pattern is much more reliable when it occurs following a strong rally in the stock and/or is near the top of a trading range, key levels of resistance. It is less reliable if the stock has recently been falling.
Example: Dow Jones Industrial Average
The Dow Jones last night completed an Evening star pattern, so we could expect a sell off tonight when the U.S market opens. Considering the Dow recently had a keen rally from its lows, it makes sense the Dow is likely to have a pullback. The evening star reversal pattern gives us an entry point to trade it.
There are many ways that you could take advantage of this reversal. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to find out more about this potential opportunity or would like to learn more about trading systems, please call Traders Circle on 03 8080 5788 and speak to one of our advisers.
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