Star formations during significant uptrends or downtrends are important indicators of a possible reversal in the respective trends. During uptrends, the reason could be either lesser buying volumes or selling pressure due to fundamental issues not supporting the up trend. During downtrends, it could be either lesser selling volumes or renewed buying due to positive fundamentals for the stock.
There are two variations of the star formation:
Normal star formation:
During a major uptrend, the first candle in a star formation is a Green candle with a large real body. The second candle has a small real body. The real body of the second candle (either Green or Red) should ideally be within the shadows and not overlapping with the real body of the first candle. Small real body of the second candle is an indication that the bulls (buyers in control) are losing control and there is deadlock between the buying and selling forces.
During a major downtrend, the first candle in a star formation is a Red candle with a large real body. The second candle (either Green or Red) has a small real body. The real body of the second candle should ideally be within the shadows and not overlapping with the real body of the first candle. Small real body of the second candle is an indication that the bears (sellers in control) are losing control and there is deadlock between the buying and selling forces.
Doji star formation:
During a major uptrend, the first candle in a star formation is a Green candle with a large real body. The second candle is a Doji. The doji should ideally be within the shadows and not overlapping with the real body of the first candle. Doji is a clear indication that there is indecision and prior bull run might be ending and possible reversal.
During a major downtrend, the first candle in a star formation is a Red candle with a large real body. The second candle is a doji. The doji should ideally be within the shadows and not overlapping with the real body of the first candle. Doji is a clear indication that there is indecision and prior bear run might be ending and possible reversal.
