A shooting star is a bearish candlestick with a long upper shadow, little or no lower shadow, and a small real body near the low of the day. It appears after an uptrend indicating a potential reversal. Simply put, it forms when a security opens, advances significantly, but closes near the opening price by the end of the trading day.
For a candlestick to be classified as a shooting star, it must appear during a price advance. Additionally, the distance between the highest price of the day and the opening price should be more than twice the size of the candlestick’s body. Ideally, there should be little to no shadow below the real body.
Key Insights
- A shooting star appears after an advance and indicates the potential start of a price decline.
- The formation is bearish since prices tried to rise during the day but were pushed back down by sellers.
- Traders await the next period to confirm the signal. A decline following a shooting star could encourage selling or short selling.
- If prices rise after a shooting star, the move could have been a false signal or indicate resistance in the price range of the candlestick.
Understanding the Shooting Star
Shooting stars suggest potential price top and reversal. This candlestick is most reliable when it forms after multiple consecutive rising periods with higher highs, marking the end of an upward surge.
After an advance, a shooting star opens and rises strongly, echoing previous buying pressure. However, by the end of the trading day, sellers often step in and push the price down to near the opening level, erasing potential gains and indicating a shift in control from buyers to sellers. The long upper shadow signifies the buyers who entered during the day but were ultimately overtaken as prices fell.
Confirmation of the shooting star occurs with the candlestick that follows—the next candle’s high must stay below the shooting star’s high and close lower. An ideal confirmation involves the following candlestick gapping lower or opening near the previous close and then moving lower on high volume, reinforcing the potential reversal. A downward movement post-shooting star hints that prices may continue to fall, prompting potential selling or short selling actions by traders.
What to Watch For
If prices rise after a shooting star, the pattern may still indicate resistance around the shooting star’s price range. Prices might consolidate in that area before ultimately continuing to rise, maintaining the uptrend and suggesting traders prefer long positions over selling or shorting.
Practical Example of a Shooting Star
In this example, a stock is in an uptrend, accelerating before the shooting star formation. The shooting star shows the price opened, moved higher (long upper shadow), but closed near the opening price. The subsequent day’s candlestick closed lower, supporting a potential price drop. Following the shooting star, the price declined over the next month. Traders could use the confirmation candle to exit long positions.
Differences Between a Shooting Star and an Inverted Hammer
The inverted hammer and the shooting star appear identical with long upper shadows and small bodies near the low, with minimal lower shadow. The primary distinction is context; a shooting star follows an advance indicating a bearish reversal, while an inverted hammer follows a decline, suggesting a bullish reversal.
Assessing the Limitations
One candlestick isn’t typically significant in a substantial uptrend, as price movements are often volatile. Sellers gaining control briefly, as indicated by a shooting star, may not suggest a long-term trend change, emphasizing the need for confirmation. Even confirmed signals do not guarantee continuous price drops or define the decline’s extent. The price may resume its upward trend after a short dip.
Employing stop losses can manage risk associated with candlesticks that don’t confirm expected patterns. Use shooting stars alongside other analytic methods, as patterns can be more meaningful near levels highlighted by other technical analysis forms.
Related Terms: candlestick, open, close, bearish, short selling, false signal, resistance.
