The morningstar candle pattern is a three-period reversal formation that represents a transition in trader sentiment from bearishness to bullishness. It consists of a large dark bearish candle, followed by a narrow opening and closing range candle that reflects indecision, and it is completed by a large white bullish candle.
The pattern is often seen at important lows and can signal the start of a new uptrend.
Like all technical patterns, the morningstar requires follow-through confirmation, but it is a reliable pattern when used in conjunction with other technical indicators. A compelling feature of the morningstar is that the framework of the pattern, with the doji low defining the stop loss level, usually presents a good risk-to-reward ratio trade.
These four stocks have formed morningstar patterns on their weekly charts, setting the stage for potentially profitable intermediate-term trades.
The Coca-Cola (KO) weekly chart illustrates the morningstar as well as its mirror image eveningstar pattern. The March high saw a large white candle form, which was immediately followed by a hanging man candle or a long lower shadow doji candle and then a large dark candle. This price action is the opposite of the morningstar and represents a bearish reversal in sentiment. It marked the 2016 high, and the reversal that followed has now retraced 38% of the 2015 low and this year's high.
This Fibonacci level is a good psychological support level, and the morningstar pattern has formed just above it and just below the intersection of the declining 10-week (50-day) moving average and the 40-week (200-day) average. It now has to reverse the negative price momentum reflected in the stochastic oscillator reading, as well as the negative direction of money flow suggested by the Chaikin money flow indicator.
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Aqua America (WTR) supplies water and waste water services to municipalities. Its weekly chart shows a morningstar forming at a level defined by two Fibonacci retracements. The first is drawn off the 2014 low and the 2016 high and the second off the 2015 low and the 2016 high.
This pattern, like its sister pattern on the Coca-Cola chart, has also met resistance at the nexus of the 10-week and 40-week averages. The stochastic oscillator is making a bullish crossover in an oversold condition, and money flow is in positive territory.
Royal Caribbean Cruises
Royal Caribbean Cruises (RCL) saw a sharp drop in its stock price at the beginning of this year, which took it down to the 50% retracement level of its 2013 and 2016 range. This support in the $65 area has become the base line of a large triangle pattern, and the Morningstar pattern on this chart formed at that support and then closed after retesting the triangle downtrend line.
There is a slight bullish divergence on the stochastic oscillator, and money flow is positive with an upside bias. A break out from the triangle pattern suggests an upside target in the $92 area.
Auto parts manufacturer, Magna International (MGA) has spent its time this year forming a large cup and handle pattern on its weekly chart, with rim line resistance in the $42-to-$43 area. The 10-week average is making a golden cross above the 40-week average, and the morningstar pattern has formed just above this intersection and just below the cup and handle rim line.
Moving average convergence/divergence is tracking higher and crossing above its center line, stochastics is in an overbought condition, and Chaikin money flow is reflecting buying pressure. A break above rim line resistance projects back up near the highs of this year.