How to Identify an Evening Star

The Evening Star pattern consists of three candlesticks:

Large bullish candle (Day 1)

Small bullish or bearish candle (Day 2)

Large bearish candle (Day 3)

Day 1 The first part of an Evening Star reversal pattern is a large bullish green candle. On the first day, bulls are in charge – new highs are usually made.

Day 2 The second day begins with a bullish gap up. It is clear from the opening of Day 2 that bulls are in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji). Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending reversal.

Day 3 The most significant candlestick occurs on Day 3. It begins with a gap down (a bearish signal) and bears are able to press prices even further downward, often eliminating the gains seen on Day 1.

Day 1 of the Evening Star pattern for Exxon-Mobil (XOM) stock above was a strong bullish candle. In fact, it was so strong that the close was the same as the high (very bullish sign).

Day 2 continued Day 1’s bullish sentiment by gapping up. However, Day 2 was a Doji, which is a candlestick signifying indecision. Bulls were unable to continue the large rally of the previous day. They were only able to close slightly higher than the open.

Day 3 began with a bearish gap down. In fact, bears took hold of Exxon-Mobil stock the entire day. The open was the same as the high and the close was the same as the low (a sign of very bearish sentiment). Also, Day 3 powerfully broke below the upward trendline that had served as support for XOM for the previous week. Both the trendline break and the classic Evening Star pattern gave traders a potential signal to sell short Exxon-Mobil stock.

Please note, this is an example trade – not a recommendation.