64 The Basics
...
: A HSTORICAL NOTE
: The full name of the evening and morning star patterns are the three-river
i
: evening star and the three-river morning star. I originally thought they were : : termed "three-river" evening and morning stars because each of these
i
: patterns had three candlestick lines-hence three rivers. I discovered that :
i
the origin is much more fascinating.: Nobunaga Oda, a major military figure of the late 16th century, was
i
: one of the three military leaders who unified feudal Japan (see Chapter 2). :
i
He fought a seminal battle that occurred in a very fertile rice growing : : province. Since rice was a gauge of wealth, Nobunaga was as determinedi
to wrest this area as fervently as the owners were to defend it. This fertile : : rice area had three rivers. The heavily defended area made it difficult for : Nobunaga to cross these three rivers. Victory was his when his forces
i
finally forded these three rivers. Hence the name "three river" morning : : and evening star where it is difficult to change the trend. Yet, victory fori
: the attacking army is assured when the hurdle of the "three rivers" is :
; crossed.
...
3. If there is light volume on the first candlestick session and heavy vol- ume on the third candlestick session. This would show a reduction of the force for the prior trend and an increase in the direction force of the new trend.
EXHIBIT 5.13. Evening Doji Star
EXHIBIT 5.15. Abandoned Baby in a n Uptrend
EXHIBIT 5.14. Morning Doji Star
Abandoned Baby
EXHIBIT 5.16. Abandoned Baby in a Downtrend
In a downtrend, if there is a black real body, followed by a doji star, confirmation of a bottom reversal would occur if the next session was a strong, white candlestick which closed well into the black real body.
That three candlestick pattern is called a morning doji star (see Exhibit 5.14). This type of morning star can be a meaningful bottom. If, during a downtrend, a black candlestick gaps under the doji star, the potentially bullish implications of the doji star is voided. This is why it is important to wait for confirmation in the next session or two with doji stars.
If there is an upside gap doji star (that is, the shadows do not touch) followed by a downside gap black candlestick where the shadows also do not touch, the star is considered a major top reversal signal. This is called an abandoned baby top (see Exhibit 5.15). This pattern is very rare!
The same is true, only in reverse, for a bottom. Specifically, if there is a doji star that has a gap before and after it (where the shadows do not touch) it should be a major bottom. This pattern is referred to as an abandoned baby bottom (see Exhibit 5.16). It is also extremely rare! The abandoned baby is like a Western island top or bottom where the island session would be a doji.
Exhibit 5.17 shows that a doji star in early June halted the prior price decline. It is still called a star although the shadow of the doji star bot- tom overlaps the prior day's black real body. When the white real body appeared after the star, confirmation of the downturn was over. The
66 The Basics
EXHIBIT 5.17. Wheat- December 1989, Daily (Morning Doji Star)
7 : 4 8 CFUO DAILY BAR @ 1990 CQG INC.
o= . . . .
... ...
... ...
EXHIBIT 5.18. Coffee-September 1990, Daily (Morning Doji Star)
435
430
...
I .
, ,
. . .... I .
Star
... I 8 .
I
I I I
400
395
26HAY89 9JUN 23
Source: Bloomberg L.P.
black real body before and the white real body after the doji star made this three-line pattern a morning doji star.
On the doji star candlestick of Exhibit 5.18, prices broke under $35.
This was a support area from early in July. The fact that the new lows could not hold is considered bullish. Add to this the morning doji star pattern and you have two reasons to suspect a bottom.
Exhibit 5.19 is an example of both an evening doji star and a regular evening star. Price action from March through May 1986 formed an evening doji star. This pattern halted a sharp rally which began just a few months previously. A selloff ensued after this evening doji star. It ended with the bullish engulfing pattern. The rally from that engulfing pattern topped during the evening star pattern of mid-1987.
In Exhibit 5.20, we see the three lines that form the evening doji star on March 17, 18, and 19. This pattern ended the rally that began with a hammer the prior week. This example again shows that certain candle- stick configurations should have more latitude in the equity market. This is because, unlike futures, stock prices may open relatively unchanged from the prior close. This means that specific patterns that relate the open to the prior day's close may have to be adjusted for this fact.
In the case of Dow Chemical, note how the evening doji star was not
Long
68 The Basics
EXHIBIT 5.20. Dow Chemical-Daily 1990,
(Evening Doji Star) Source: Bloomberg L.P.
a true star. A doji star's real body (that is, its opening and closing price) should be over the prior day's real body. Here it was not. Therefore, allow more flexibility with candlestick indicators with equities. For those who monitor the equity markets, as you experiment with candlestick techniques, you should discover which patterns may have to be modi- fied.
In Exhibit 5.21, one can see that a few weeks before 1987's major sell- off, an evening doji star top arose. The center candlestick of this pattern (the doji star) did not gap above the prior white candlestick as should a true star. However, as discussed in Exhibit 5.20, one should allow more latitude with this concept of gaps since stocks often open at, or very near, the prior session's close.
Exhibit 5.22 reveals a very unusual and ominous occurrence in that back-to-back evening doji patterns formed. Candlestick lines 1 through 3 formed an evening doji star. The next three sessions, lines 4 through 6, fashioned another evening doji star.
. .;
...
...
....
... ...
1 I
Jul dct Jan A P ~ JUI Oct Jan
1988 A P ~
1987
... ...
,
...1
... ...1
...! -
iI 90
... _: ... ..:... : ... _._.. :.. .
I"" I""
Source: @Copyright 1990 Commodity Trend Servicee
EXHIBIT 5.21.
NY SE-Weekly (Evening Doji Star).
9 : 2 2 SlZO DAILY BQR @ 1990 CQG INC.
O= 4925 .
H= 4930 ,
L= 4860 .
L= 4 8 6 8 ~ . . . . .
. , . , ,
520C
. .
...
. . . . .
8/31/90 O= 4925 . H= 4930 .
L= 4860 ... -
C= 4868 .Jun .Jul .Aug 4800
I 128 14 I l l 118 125 12 I? 116 123 130 I6 113 120 127 i
70 The Basics
White or Black
I EXHIBIT 5.23. Shooting Star