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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Shooting Star Candlestick

What it is:

The shooting star candlestick is a chart formation consisting of a candlestick with a small real body, and a large upper shadow. This pattern represents a potential reversal in an uptrend. It is also one of the four types of stars in candle theory: morning, evening, doji, and shooting.

How it works (Example):

The shooting star is relevant only when appearing at a potential market top. When looking at a daily chart, it is possible that this candle will warn of a reversal in the minor uptrend. Since they typically only last between six and fifteen days, traders should be particularly alert if a minor uptrend is mature. Similarly, a shooting star on a weekly chart can alert you to a change in the Intermediate trend.

In order for a shooting star to occur, the preceding candle should have a large real body. The day or week the shooting star occurs, the market should ideally gap higher (this gap is more common with commodities than stocks.)

The stock or index should then rally sharply. At this point, it appears as though the longs are in complete control. However, at some point during the day or week, profit taking will ensue. The stock then closes near unchanged, as shown by a small real body. Therefore, a shooting star has a small real body and a large upper shadow. Typically, there will be either no lower shadow or a very small one.

The small real body shows that the bulls and bears are at war with each other. Whereas the bulls had been in control during the uptrend, the two sides are now evenly matched. 

The chart above depicts a shooting star in the S&P 500. While there is a small lower shadow present, note that the large upper shadow failed at the sideways-moving 30-week moving average -- an area of key resistance. As with all candles, this message should be confirmed by the trading action that occurs during the following days. At best, however, the shooting star warns that there is a significant group of sellers waiting to unload shares, since the price is not able to sustain the higher level. 

Why it Matters:

By accurately recognizing the shooting star candlestick, you'll have another important tool in your arsenal to assist in spotting early signs of a reversal. This candle will warn of the end of an uptrend before trend-following tools such as moving averages or MACD