Shooting Star Candlestick
The shooting star candlestick pattern occurs after an uptrend and bullish candlestick and acts as a signal of a potential top. According to Nison, the shooting star is not a major reversal signal like the evening star pattern (1991, p. 70). Technically, the shooting star candlestick pattern is a two day pattern, the first day is a bullish candlestick and the second day is the actual shooting star candle. The shooting star candlestick consists of a small real body at the bottom of the candlestick with a long upper shadow and little to no lower shadow. The real body may be either bullish or bearish. It is best if the real body of the shooting star is higher than the real body of the prior day’s candlestick real body, but this is not a requirement. The shooting star is sometimes referred to as the bearish inverted hammer.
A more specific and technical definition of a shooting star is given by ThinkorSwim (2011): The prior three days must be an uptrend, the first day of the shooting star pattern must be a bullish candlestick, the real body of the second day should be less than 30% of the height of the prior 20 candlesticks’ real bodies height, and the upper shadow is two times the height of its real body.
Psychology of Shooting Star
During an uptrend, the bulls are in power. On the day of the shooting star, bulls open the day with a gap up from the prior day’s close and continue to push prices higher throughout the day. However, bears are able to counter the bulls and push prices roughly to where prices started for the day. The upper shadow of the shooting star candlestick signifies an area where bears are willing to sell and powerful enough to push prices downward; because of this, the upper shadow of the shooting star could become an area of resistance for the future.
Shooting Star Sell/Short Suggestion
Rhoads (2008, p. 165) gives an example of shorting on the close of the shooting star candlestick and also suggests placing a stop loss on the high of that same shooting star candlestick.
Shooting Star Candlestick Chart Example
The chart above of the Nasdaq 100 ETF (QQQ) shows an uptrend that peaks with a shooting star candlestick pattern. Prior to the shooting star pattern, a multi-week uptrend occurred. The first day of the pattern was a bullish candlestick. The second day of the shooting star candlestick pattern began by gapping higher, having opened at a price above the previous day’s close. The bulls continued the march upward making yet another new high for the uptrend. However, the gains of the day were completely erased by the bears and the day ended up being a bearish candlestick. A multi-week downtrend proceeded after the shooting star pattern.
Shooting Star Establishing Area of Future Resistance
The long upper shadow of a shooting star candlestick pattern gives clues that an area of resistance is being established. The chart above of the S&P Mid-Cap 400 ETF (MDY) illustrates how the upper shadow of a shooting star where bears were able to repel the bulls advance, established an area of resistance for multiple weeks to come.
- Nison, S. (2003) The Candlestick Course. Hoboken: John Wiley & Sons.
- Nison, S. (1994) Beyond Candlesticks: New Japanese Charting Techniques Revealed. New York: John Wiley & Sons.
- Nison, S. (1991) Japanese Candlestick Charting Techniques. New York: New York Institute of Finance.
- Rhoads, R. (2008) Candlestick Charting For Dummies. Hoboken: Wiley Publishing.
- ThinkorSwim. (2011). ThinkorSwim Resource Center: Candlestick Patterns Library.