The Shooting Star is a bullish or a bearish candlestick pattern that usually appears after a series of preceding price declinations or price increases. It is easily identified as having a thick lower body with the days closing higher than the opening and the high of the day above the thick body like so -
A shooting star may occur either as a bullish signal or as a bearish signal depending upon the preceding candles.
A shooting star at the top of a series of rising candles maybe indicate that the rally has come to an end.
A shooting star at the bottom of a series of declining candles may indicate a reluctance of the market to sink any further and set a tone for an impending rise in prices.
As a real life application, in the EUR/ USD chart, we all know that the EUR has been sinking since 4 months ago where the EUr stood at 1.35 to the Dollar in August 2014. Recently the SNB caught the market by surprise and the EUR sank precipitously the last 2 weeks in particular on Thursday Jan 15th. Now here below is an example of a bearish shooting star that failed to stop the declination of the price action.
Given the SNB action and the further woe of ECB Q.E weighing in heavily on the beleaguered EUR, the market crashed on Thursday 15th Jan.
But in spite of the carnage of the day, the EUR depreciation had already been inaction effectively for the last 6 months since the giddy heights of 1.40. Thus on the 20th Jan after the market reopen from the weekend the EUR found a moment to pause since most of the negative sentiment had already been factored into the price action. The result was a pause over 3 days Jan 20-22 which saw 2 shooting stars form with a failed upward piercing penetration. The market fell from 1.1786 on Thursday 15th January to 1.1598 on Monday 20th January with 2 succeeding shotting stars trying to rise thru the 1.16.
After the SNB action the shortening EUR market had quite literally run out of steam with the predilection for EUR bashing. Markets do not rise and fall in a line but they take a zig and a zag as traders pause from bashing each other on price action. This can be attributed to short covering, or traders booking profits for the moment. Nevertheless, further ECB Q.E statements began to weigh in heavily once again and so the EUR started to slide again from the position of the 2 shooting stars at 1.16 right down to 1.1347 ion January 23rd. This is an example of shooting stars failing to lift the market in the face of overwhelming directional trade pressure. if anything the 2 shooting starts portrayed can only reflect a brief moment of profit taking for the shorts.
This example of is a shooting star signalling a respite in the short term only. But not a key reversal pattern. Therefore further slides in prices are expected. swing traders take advantage of these short respites to book quick profits over a 1-3 day trading range. And as the EUr sinks lower to Dollar parity the resistance becomes stronger and the volatility greater. Thus traders in the near future would expect more sessions of quick short pressure and fast profit taking.
Pieter Bergli - DeLoren Trust Holdings
A non-profit educational course for the currency markets
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