The three stars in the south pattern is one of the bullish reversal secondary candlestick patterns and is the opposite of the advance block pattern. This pattern consists of three candlesticks that appear at the end of a downtrend. It is obvious that the trend is slowing down and that selling is weakening. This first candlestick very closely resembles the hanging man pattern. It is a long black (or red) body that occurs at the end of this downtrend. Its long shadow indicates that there was previous buying. The second candlestick resembles the first however it is the smaller version. The third candlestick is also a black (re red) body and is a Marubozu with no shadows. A bullish day following the three stars in the south candlestick pattern provides confirmation that the downtrend fizzled and then reversed.
Criteria for the Three Stars in the South
- The first black (or red) candle day has a lower shadow that indicates that the buyers are stepping in. It is almost a hammer signal.
- The second day produces a candlestick just the like the first but on a smaller scale.
- Day three should be a Marubozu with no shadows. It is within the previous day’s trading range.
Pattern Psychology
The daily formations begin to occur after the downtrend and they indicate bullish behavior in the stock. The second day indicates the same message on a smaller scale as it gaps up on the open and then closes lower on the session. The third and final day is completely engulfed by the first candlestick and price movement slows down. The bears should now be concerned about their positions. New lows are diminishing rapidly but this gives enough time for the short sellers to start covering their positions.
The secondary signals are titled as such because they do not appear as frequently as the 12 major signals. That does not negate the effectiveness of these signals for identifying reversals. Be aware of the implications of these signals and it will provide you with additional opportunities during the course of your investment decisions.
