Shooting Star is a formation of two candles and indicates the possible end of the uptrend. This formation is a variation of the Evening Star pattern. However, unlike the Evening Star, a Shooting Star is not a major reversal signal.
The structure of this pattern is similar to the first two candles of the Evening Star. Shooting Star appears in an uptrend. The first candle of the pattern is a relatively long upward candle with small shadows. The body of the second candlestick appear at the bottom of the first candle; the upper shadow of the second candle is long. Like other Stars, the body color (direction) of Shooting Star does not matter. The body of the perfect Shooting Star forms a gap with the body of the preceding candlestick. However, in today’s markets, the gap between the candles is rare. So, for pattern identification the gap can be neglected. For the successful identification of a Shooting Star, it is important that the pattern forms on the relative price maximums either near the borders of the price channel.
This candlestick pattern demonstrates that the trading session opened near the day low, then the price rapidly soared and fell again, so the closing price is closer to the opening price. In other words, the rise of prices during the trading session proved to be untenable.
Candlestick in the form of falling star, which appeared after the downtrend, can be a bullish signal. Such candle has a name Inverted Hammer. In appearance, the pattern reminds the mirrored Shooting Star (indicates the reversal of a downward trend to up).
Inverted Hammer appears on the downtrend. The second candle of the Inverted Hammer has a small body, located in the lower part of the candle range, and long upper shadow. Unlike a Shooting Star, Inverted Hammer indicates a possible reversal at the bottom of the price range. As usual Hammer, an Inverted Hammer is a bullish reversal signal if it appears after a downtrend.
To confirm the bullish reversal signal of the Inverted Hammer, it is necessary to wait for bullish confirmation signal during the next trading session. Such confirmation may be when the opening price of the next day appears above the body of the Inverted Hammer. The greater the price gap, the more pronounced confirmation signal. Other confirmation can be the upward candle with a higher price level.
The price movement which formed an Inverted Hammer seems bearish. Therefore, it is necessary to confirm the bullish reversal signal of the Inverted Hammer. The second candle of Inverted Hammer pattern opens near the low line of the first candle, and then the price begins to rise. However, the bulls are not able to keep the market at this level, and the closing price is again approaching the low line of the previous candle. If the opening price of next candles is above the body of the Inverted Hammer, those who took a short position at the opening price or the closing price of the Inverted Hammer day, lose money. The longer the market holds above the Inverted Hammer’s body, the greater the likelihood that these short positions will be closed. The active short covering may cause the price increase, and this will encourage traders, waiting for the end of the recession and looking to buy at the minimum price. The result of such chain reactions can be a significant price increase.