iBankCoin
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Joined Apr 1, 2010
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The Shooting Star Explained

I am going to use Wellpoint as a current, real-time example of a shooting star bearish reversal candle which appeared to confirm lower on Thursday. The purpose of this post is more for educational purposes, though, for those of you who would like to learn more about candlestick theory.

In Japanese candlestick terminology, a shooting star looks exactly the same as an “inverted hammer,” (literally a hammer flipped upside down) in terms of outward appearance. However, a key difference is their respective placement on the chart. After a prior steep downtrend, the inverted hammer can actually signal a potential bullish reversal coming, whereas the shooting star is the term given to the same candle after a prior uptrend, and signals a potential bearish reversal.

A few elements of the shooting star (and inverted hammer):

  1. The upper “shadow” (wick) of the candle is longer than the real “body” (the head of the hammer, so to speak).
  2. There is no, or a very limited, lower “shadow,” below the real body of the candle.
  3. A true shooting star (or inverted hammer) is going to “gap” away from the prior trend, via not overlapping the prior day’s price range.
  4. The larger the upper shadow, the more prominence the candle takes on.
  5. There must be an established prior trend in order for the a reversal candle to take on any type of significance.
Beyond the basics, the most important element is that there must be confirmation of the shooting star, since a mere one candle is insufficient to base high probability trades off of in any type of aggressive manner. Applied to our current market example of Wellpoint, you can see the clear, steep uptrend for months on end, followed by Wednesday’s textbook shooting star daily candlestick, then Thursday’s downside follow-through. The presumption now is that Wellpoint is in the process of putting in an intermediate-term top, with a close above $90 likely negating that analysis.

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WLP

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14 comments

  1. hybullshit

    It happened to CXO 7-24-2013 (a 12631 member)

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    • chessNwine

      Prior uptrend there was not as steep, only a couple days up. To me it looks like just needed time for more consolidation.

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      • Mikeywins

        do you have more of these lessons posted and can you suggest how I can organized and read them all? Thanks for all you do. You are a huge addition to what I do and I have had an amazing run do to the edge that I now believe I have.

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  2. your sisters panties
    your sisters panties

    Chess how would you determine a downside target with this pattern?

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    • chessNwine

      Good question. Tough to do with a shooting star, easier to do with a full-on pattern like a head and shoulders. Basically, the value-add from the shooting star is that a change in trend is likely upon us.

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  3. Ganesh

    Wonderful post. SLCA on 04/11 slid from 23.55 to 19.80 in matter of 5 trading days. That is a phenomenal 17% plus plunge when you take into consideration the timeframe. Only after reading your blog, I noticed this.
    Thank you so much.

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