The shooting star is a variant of the evening star, it is a down turn figure composed of three candlesticks. The 2nd candlestick is the star itself and in the case of the shooting star, it is represented by an inverted hammer.
The elements characterising it are:
- The shooting star has to appear after an uptrend.
- The first candlestick must have a green body.
- The second candlestick should preferably draw a bullish gap, its body color is not important but it must be located on the bottom of the candlestick and, most importantly, the upper shadow should be long (at least two times the size of the body).
- The third candlestick should, ideally (but not necessarily), trace a bearish gap and have a large red body.
Such a structure is formed when, following an upward trend, after a day of advances, the rates open up with a high and form a gap with respect to the closure of the previous day, they rise sharply but then back down to come close near the opening level. The next day the course opened in bearish gap and eventually fall to erase much of what was won on the 1st Japanese candlestick. This confirms the structure and the major force is now bearish. It shows the inability of bulls to keep prices high.
Note that the 2nd candlestick should ideally form with a gap between the 1st and the 2nd and 3rd candlestick, the gap is also preferred but not required. As for the body of the 2nd candle, the color does not matter even if red is the ideal.
The greater the gaps, the more important will be the figure. The bigger the shadow of the second candlestick is, the more significant will be the shooting star. The shooting star is less restrictive than the evening star, these elements will determine its potential power. The turning power may be low if there is just the presence of a large upper shadow on the 2nd candlestick, but it will be stronger if we count the presence of gaps. Large volumes on the 3rd candlestick will also come in confirmation of the figure.
Whatever the quality of the gaps and the star, it is better to wait out the figure and the formation of a red body before initiating a position. Depending on the quality of the shooting star, short selling may be initiated at J+2 (J being the day of the star and that of J+1 that of the red candle). The threshold for invalidation may be placed either above the highest structure of above the second gap if there is one.
It is interesting to combine the turning figures with the lines of support and resistance. A shooting star can thus sometimes form at the level of resistance and even cross momentarily, without invalidating, it and lead to a reversal in the decline.