What Is a Shooting Star Pattern?
Shooting Stars indicate a potential price top and reversal. The formation is bearish because the price tried to rise significantly during the day, but then the sellers took over and pushed the price back down toward the open.
Example of a Shooting Star
What Does the Shooting Star Signal?
The Shooting Star signals that bears have overtaken the bulls in terms of control over the market and a potential reversal to the downside is underway. This pattern is a good signal to close out longs and start looking for short positions as the direction is about to flip.
The candle that forms after the shooting star is what confirms the shooting star candle. The next candle’s high must stay below the high of the shooting star and then proceed to close below the close of the shooting star. Ideally, the candle after the shooting star gaps lower or opens near the prior close and then moves lower on heavy volume.
If the price rises after a shooting star pattern is formed, the top wick of the shooting star may still act as a level of resistance. The price may consolidate in the area of the shooting star and then if it ultimately continues to rise, the uptrend is still intact and traders should favor long positions over selling or shorting.
Trading a Shooting Star Pattern
Looking at the daily time frame of WKHS (Workhorse Group Inc.) we can see a pretty evident double top that’s formed with the first local high indicating a drop off of a hanging man pattern, and the second being a shooting star before the price really falls down. This ‘double top’ formed with the second high painting a shooting star pattern dropped about 50% in market cap after forming. The 1st indicator was the hanging man and the 2nd indicator to sell short and close out longs would’ve been the shooting star pattern.
Looking at the 15-minute time frame of LYFT we can see a pretty gnarly shooting star pattern formed. The start of the uptrend after the dump bottomed out around $15 before moving up to a high of $25 on the range of this shooting star before marking the local top. Take note of the length of the upper wick of this candle, where if the price would’ve kept moving up higher, the top most part of this candle would’ve acted as a level of resistance. However, the shooting star usually indicates a bearish reversal and we saw here it did just that and sold off back down to $19.
Differences Between the Shooting Star and Inverted Hammer
Although these two patterns look basically the exact same as a single candlestick, they are found at distinctly different parts of the trading asset. The shooting star pattern is found at the top of a bullish swing and usually indicates that the bears have overtaken the bulls, offering traders a red flag warning to close out their long positions and start looking for short opportunities. On the other hand, the inverted hammer pattern is found at the bottom of a bearish trend and usually indicates that the bulls have overtaken the bears, offering traders an opportunity to close out their shorts and start looking for long opportunities along a level of support.
Limitations of Shooting Stars
Shooting Star candles can be painted by market makers at the top of an uptrend to signal a potential higher price to come in the market. Buying solely off of a shooting star doesn’t necessarily mean that the bullish swing is over or the uptrend is reversing right away. Always tread with caution and wait until the next candle until making your decision, as this candlestick pattern is very versatile and prone to moving in either direction.