The morning star and bullish doji star patterns

The morning star and bullish doji star are recognized as separate patterns, but because they have very similar characteristics, I've grouped them together in this section.

Identifying the morning star and bullish doji star

You can see basic examples of both the morning star and bullish doji star patterns in Figure 9-10. The only real difference between the two patterns is the second day. The second day of the bullish doji star is a true doji, while the second day of the morning star pattern is almost a doji.

The price action behind these two patterns is very similar. The first day for both patterns is a down day, which is to be expected in a bullish reversal pattern. The second day for both patterns starts with a gap opening, indicating that the bears are continuing to push down the price. Then the rest of the second day is made up of very tight price action between the open and close. The third day is very bullish, with prices rising to cover some or all the ground from the down day. When you spot one of these patterns in a downtrend, it usually means that the trend is ready to reverse.

Figure 9-10:

The morning star and bullish doji star patterns.

Figure 9-10:

The morning star and bullish doji star patterns.

Trading on the morning star and bullish doji star patterns

Figure 9-11 is a chart of the Euro futures, and it's a good example because the bullish doji star pattern in the chart indicates that the trend has reached the bottom. Keep in mind that the bullish doji star here could just as easily be a morning star pattern, and the result would be the same.

The days play out in the following pattern:

1. The first day of the pattern is actually the third of three bearish days.

Leading up to this pattern, the bears are ruling the price action.

2. The second day features a gap opening that's a little lower than the low of the first day, and the day ends up forming a doji after some back and forth between the bulls and bears.

The doji has pretty long legs, indicating an intense battle for price action during the day.

3. The third and final day of the pattern is a white candle, indicating that the bulls ruled the day.

It closes high and into some of the range covered by the first day. The two days after the pattern see a bit of bearish price action, but no significant support levels are violated, and then three days later the bulls really get rolling, and it's clear that an uptrend is in place. And what an uptrend it is!

To take advantage of this type of bullish doji star pattern (or a morning star pattern in the same situation), you should either try to buy near the end of the pattern, or possibly attempt to put on a long position on any sort of near-term price weakness that doesn't violate a stop level.

Figure 9-11:

The bullish doji star pattern performs favorably on the Euro futures chart.

Figure 9-11:

The bullish doji star pattern performs favorably on the Euro futures chart.

As you can see, raking in a profit on a trade based on the bullish doji star or morning star is a definite possibility if you keep your eyes open and place your trades wisely. But the pattern can also fizzle out and cause losses.

The bullish doji star not Working too Well

Figure 9-12 is a chart with a morning star pattern that has the potential to cause some heartbreak. It's a chart of the stock for Janus Capital Group (JNS), which is an asset manager of over $150 billion in investments. Yes, that's billion, with a b. Keep in mind that this could also be a bullish doji star because the patterns are extremely similar and basically interchangeable for your trading purposes.

The morning star arrives after a downtrend has been in place for a few weeks. The trend appears to be moderating a bit — an encouraging sign if you're looking to buy a stock. The pattern is completed in textbook fashion, with just one exception. The stock doesn't change trend very quickly. The price levels established by the pattern that you may use as stops are violated a few weeks after the pattern appears; you may want to bail out on this trade long before that.

Another factor that may be used when you're determining when to exit a trade is time. A violated price level isn't the only way a pattern can fail. You can also consider a pattern a failure due to the passage of time. If you see a promising pattern that doesn't fail but the hoped for price action doesn't occur, feel free to call it a failure and get out. How long you wait before bagging it is up to you, but using a time stop is a very useful trading tool.

Figure 9-12:

The morning star pattern fails on a chart of JNS.

Figure 9-12:

The morning star pattern fails on a chart of JNS.

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