A shooting star is a two-line pattern that sends a warning of an impending top. It looks like its name, a shooting star. It is usually not a major reversal signal as is the evening star. As shown in the Exhibit 5.23, the shooting star has a small real body at the lower end of its range with a long upper shadow. As with all stars, the color of the real body is not important. The shooting star pictorially tells us that the market opened near its low, then strongly rallied and finally backed off to close near the opening. In other words, that session’s rally could not be sustained.
An ideal shooting star has a real body which gaps away from the prior real body. Nonetheless, as will be seen in several chart examples, this gap is not always necessary.
A shooting star shaped candlestick after a downturn could be a bullish signal. Such a line is called an inverted hammer.
In Exhibit 5.24, one can see that on April 2, a bearish shooting star was signaling trouble overhead. Exhibit 5.25 well illustrates the shooting star and its variations. Shooting star variations include the following:
Shooting star 1 is a variation on a shooting star. It is not an ideal star because there is no gap between the real bodies. It, nonetheless, proves the failure of the bulls to maintain their drive.
Shooting star 2 is of little importance. It does meet part of the criteria of a shooting star (that is, a star with a small real body and long upper shadow). Yet, it fails to meet one important rule. It does not appear after an uptrend nor at the top of a congestion zone. As such, it should be viewed as a small real body day with little significance. A small real body (that is, a spinning top) reflects indecision. In the middle of a trading range indecision should be expected.
Shooting star 3 has the shape of the shooting star but it is not a true star since it does not gap away from the prior real body. However, this day’s shooting star should be viewed in context of the prior price action. The top of the upper shadow for shooting star 3 is an assault at the early August high at $6.18. The bulls exhausted themselves on
the intra-day rally to that level. The soybeans then closed near the low of the day.
Shooting star 4 is very similar to shooting star 3. It also is not an ideal shooting star since its real body did not gap away from the prior real body. Yet it was another rally attempt that faltered near $6.18. It proved that the bulls could not gain control.
(Shooting stars 3 and 4, although not ideal shooting star patterns, bring out an important point. As I said in the beginning of the book, the patterns do not have to be perfectly formed to provide a valid signal. Always view candlestick lines and patterns in the context of the other technical evidence. Thus, shooting stars 3 and 4 were not ideal, yet the shape of the shooting star line, itself, in context with the prior action, was bearish.)
Shooting star 5 is another failure at resistance. You have to admire the bulls’ tenacity, though, in trying to push this market higher. With each failure at the $6.18 resistance, one has to wonder how long will it be before the bulls give up. We get the answer with shooting star 6.
Shooting star 6 was the final failed push. The bulls then gave way. The hammer then called the end of the selloff.
Exhibit 5.26 is another example where the shooting star pattern did not gap away from the prior real body. It was, nonetheless, a significant reversal signal. Here again let us look at the shooting star in context. It was another failure at the third quarter 1989 highs. The shooting star spelled the end of a rally that began with the hammer.
Exhibit 5.27 reveals that a classic shooting star made its appearance in the first hour of May 29. The ensuing price decline stopped at the bullish engulfing pattern on June 4.
Exhibit 5.28 illustrates two shooting stars that preceded meaningful price declines. Exhibit 5.29 shows that the shooting star was also a failure at the October/November 1989 highs. A double whammy! Exhibit 5.30 shows a pair of shooting stars. Each spelled the end of the preceding rally.
THE INVERTED HAMMER
While not a star pattern, we’ll discuss the inverted hammer in this section because of its resemblance to the shooting star. Exhibit 5.31 illustrates that an inverted hammer looks like a shooting star line with its long upper shadow and small real body at the lower end of the range. But, while the shooting star is a top reversal line, the inverted hammer is a bottom reversal line. As with a regular hammer, the inverted hammer is a bullish pattern after a downtrend.
Refer back to the corn chart discussed in Exhibit 5.27. Look at the first candlestick of the bullish engulfing pattern of June 4. It has the same appearance as the shooting star (the color of the real body does not matter). In this instance, it appears during a downtrend and thus it becomes a potentially bullish inverted hammer.
It is important to wait for bullish verification on the session following the inverted hammer. Verification could be in the form of the next day opening above the inverted hammer’s real body. The larger the gap the stronger the confirmation. A white candlestick with higher prices can also be another form of confirmation.
The reason bullish verification of the inverted hammer is important is because the price action that forms the inverted hammer appears bearish. To wit, on the inverted hammer session the market opens on, or near its low, then rallies. The bulls fail to sustain the rally and prices close at, or near, the lows of the session. Why should a line like this be a potentially bullish reversal signal? The answer has to do with what happens over the next session. If the next day opens above the real body of the inverted hammer, it means those who shorted at the opening or closing of the inverted hammer day are losing money. The longer the market holds above the inverted hammer’s real body the more likely these shorts will cover. This could spark a short covering rally which could lead to bottom pickers going long. This could feed upon itself and a rally could be the result.
In the corn example, the inverted hammer was followed in the next session by a bullish engulfing line. That line served as confirmatory price action.
As seen in Exhibit 5.32, shooting star 1 eased the market into an essentially lateral band from its prior strong rallying mode. The black candlestick after shooting star 3 corroborated a top since it completed a bearish engulfing pattern. The decline that started with shooting star 3 ended with the March 27 and 28 piercing pattern. This pattern formed the foundation for a rally which terminated at shooting star 4. Observe where the decline after shooting 4 stopped-an inverted hammer on April 21 which was substantiated by the next day’s higher white real body. If this white real body was longer, we could say there was a bullish morning star (the black real body before the inverted hammer, the inverted hammer, and the white real body after the hammer would make up this three candlestick morning star pattern if the third white line was longer). The rally initiated with the bullish inverted hammer pushed prices up, until another-you guessed it-shooting star at 5.
Exhibit 5.33 illustrates other examples of inverted hammers. Note how inverted hammers 1 and 2 were confirmed by stronger prices the following day. This is important. Inverted hammer 2 became part of a morning star pattern.