BEARISH EVENING STAR
Definition
This is a three-candlestick pattern signaling a major top reversal. It is composed of a white candlestick followed by a short candlestick, which characteristically gaps up to form a star. Then we have a third black candlestick whose closing is well into the first session’s white body. This is a meaningful top pattern.
Recognition Criteria
1. The market is characterized by a prevailing uptrend.
2. We see a white candlestick on the first day.
3. Then, we see a short candlestick on the second day that gaps in the direction of the uptrend.
4. A black candlestick is observed on the third day.
Pattern Requirements and Flexibility
The Bearish Evening Star starts with a white candlestick and it should continue with a short candlestick (white or black) that opens with a gap up. The black candlestick appearing on the third day should open at or lower than the highest level of the body of the second candlestick, and it should close well into the white candlestick that appears at the beginning of the pattern. The extent of how low this candlestick must close is defined according to the other candlesticks belonging to the pattern. The third day’s closing must reach the midpoint between the first day’s opening and the second day’s highest body level.
Trader’s Behavior
An uptrend is being observed, and the white candlestick confirms the continuation of the uptrend. The appearance of the short candlestick that makes a gap indicates that bulls are still pushing up the price. However, the tight price action on the second day between the open and the close shows indecision. The third day is a black body that moves into the first day’s white body. A significant trend reversal has occurred.
Sell/Stop Loss Levels
The confirmation level is defined as the last close. Prices should cross below this level for confirmation.
The stop loss level is defined as the higher of the last two highs. Following the bearish signal, if prices go up instead of going down, and close or make two consecutive daily highs above the stop loss level, while no bullish pattern is detected, then the stop loss is triggered.