The turning point of the morning star on the daily line after the weekly line has three consecutive negatives and shrinking volume

A morning star pattern after three red weekly candles may signal a bullish reversal, especially if volume picks up, but caution is warranted with low-volume breakouts.

Jul 27, 2025 at 01:28 am

Understanding the Morning Star Pattern in Cryptocurrency Trading

The morning star is a bullish candlestick pattern widely recognized in technical analysis, particularly within the cryptocurrency market. It typically appears at the end of a downtrend and signals a potential reversal in price direction. This pattern consists of three candles: a long red (bearish) candle, followed by a small-bodied candle (often a doji or spinning top), and concluded by a long green (bullish) candle. The formation suggests that selling pressure is weakening and buyers are beginning to take control. In the context of a market that has experienced three consecutive negative weekly candles, the emergence of a morning star on the daily chart may carry heightened significance. The small-bodied second candle indicates indecision, while the strong green third candle confirms renewed buying interest.

Implications of Three Consecutive Negative Weekly Candles

When a cryptocurrency asset records three consecutive red weekly candles, it reflects sustained bearish momentum across multiple weeks. This prolonged downward movement often leads to oversold conditions, especially if the price has dropped sharply without significant pullbacks. Traders monitor such sequences closely because extended downtrends can create exhaustion among sellers. The consecutive negative closes suggest consistent selling pressure, possibly driven by macroeconomic factors, negative news, or profit-taking after a prior rally. However, when this pattern is followed by a reversal signal like the morning star on the daily chart, it may indicate that the selling momentum is starting to dissipate. The transition from weekly decline to daily bullish structure is a key point of interest for swing and position traders looking for entry opportunities.

Volume Contraction and Its Significance

A critical component of the scenario described is the shrinking volume accompanying the morning star formation. Declining volume during the final stages of a downtrend often signals waning interest from sellers. When volume contracts during the first two candles of the morning star—especially during the small-bodied second candle—it suggests that bearish conviction is weakening. The low participation in selling activity makes it easier for buyers to push the price upward. When the third green candle forms with increasing volume, it confirms the reversal. However, in this case, the volume remains reduced, which may imply caution. While the pattern is bullish, the lack of strong volume on the breakout could indicate that institutional or large-cap investors have not yet entered. Retail traders should therefore validate the signal with other indicators before acting.

How to Identify the Morning Star After a Weekly Downtrend

To accurately identify this setup, traders should follow these steps:

• Switch to the weekly chart and confirm exactly three consecutive red candles with lower closes. Ensure no intervening green candles break the sequence.
• Navigate to the daily chart and locate a recent three-candle pattern where the first candle is long red, the second is small-bodied (gap down preferred), and the third is a long green candle that closes well into the body of the first candle.
• Check volume levels across the daily candles. The second candle should show noticeably lower volume than the preceding red candle, and the third candle may show slight expansion or remain flat.
• Verify the position relative to key support levels. If the morning star forms near a historical support zone, Fibonacci level, or long-term moving average (e.g., 200-day MA), the signal gains credibility.
• Use oscillators like the RSI to check if the asset was oversold (below 30) prior to the pattern, reinforcing the exhaustion thesis.

This multi-timeframe confirmation ensures the pattern is not a false signal in a choppy market.

Trading Strategy Based on This Setup

Traders can structure a trade around this pattern with defined risk parameters:

• Entry: Consider entering a long position near the close of the third green candle or at the open of the next daily candle. Some traders wait for a retest of the low of the second candle (the "star") for a better risk-reward entry.
• Stop-loss: Place the stop-loss just below the low of the entire morning star pattern, particularly beneath the second candle’s low. This protects against a resumption of the downtrend.
• Take-profit levels: Target the nearest resistance level, such as a previous swing high, a descending trendline, or a Fibonacci extension level (e.g., 61.8% or 100% retracement of the prior decline).
• Position sizing: Given the context of shrinking volume, consider reducing position size to account for lower conviction in the reversal.
• Confirmation tools: Use additional indicators such as MACD crossing above the signal line or a break above a short-term downtrend on the 4-hour chart to strengthen the signal.

Avoid entering full position immediately; consider scaling in if price continues to show strength in the following days.

Common Misinterpretations and Pitfalls

One common mistake is assuming every small green candle after a downtrend is a morning star. The true morning star requires a gap down between the first and second candles in traditional markets, though in 24/7 crypto markets, gaps are less pronounced but still observable as large downward moves between sessions. Another error is ignoring the broader market context—if Bitcoin is still in a strong downtrend, altcoins may not sustain a reversal even with a valid pattern. Additionally, traders may overlook the importance of volume behavior; a morning star with rising volume on the final candle is more reliable than one with shrinking volume. Lastly, failing to wait for the full three-candle completion can lead to premature entries. The pattern is only confirmed once the third candle closes above the midpoint of the first candle’s body.

Frequently Asked Questions

What if the morning star appears but volume increases on the third candle?

An increase in volume on the third green candle strengthens the bullish signal. It indicates active buyer participation, making the reversal more credible than when volume is shrinking. This scenario often precedes stronger upward moves.

Can the morning star pattern fail even after three red weekly candles?

Yes. Even with favorable conditions, the pattern can fail if external factors—such as exchange hacks, regulatory news, or broad market sell-offs—trigger renewed selling. Always use stop-loss orders.

Is the morning star more reliable in high-cap or low-cap cryptocurrencies?

It tends to be more reliable in high-market-cap cryptocurrencies like Bitcoin or Ethereum due to higher liquidity and less manipulation. Low-cap coins may show false patterns due to whale activity.

Does the time of day matter when the morning star forms?

Not significantly in crypto due to 24/7 trading. However, patterns forming during high-liquidity periods (UTC 00:00–04:00 or 12:00–16:00) may carry more weight due to broader market participation.