Morning Star

Every trading book has a chapter on candlestick patterns. A Hammer after a selloff means the bulls are stepping in. A Bearish Engulfing at the top of a run means the party is over. The pictures are convincing, and the stories behind them make sense. But do they actually predict anything? Our daily candlestick scanner has been detecting these patterns every evening, so we stored three years of prices and every pattern the scanner found, then checked what each stock did next. ...

If there’s one pattern every candlestick book calls a reliable bottom, it’s the morning star. Three candles: a big down day, a small “star” that gaps lower, and then a strong up day that climbs well back into the first candle. It looks like a turn, and it’s named after the planet that shows up just before sunrise. I expected it to do well when I ran our scanner’s three years of data through it. It did the opposite. ...