Wish upon a shooting star

Apurva Sheth
It's an age old legend that wishing upon a shooting star makes a wish come true. I am not sure whether it works or not. But the sight of a shooting star is absolutely fantastic. I have seen a shooting star only once in my lifetime but I still remember that incident very vividly.

However, today I am not going to talk about this shooting star which we seen only occasionally. Instead I am going to talk about another shooting star which I see regularly. Last time I left you with a question. I asked you to apply the Candlestick Addition rule to the two candles illustrated below and think what would the sum of these two candles look like?

What would the candle look like
when you add these two candles?
Source: Profit Hunter

I am sure that you would have already thought of a candlestick in your mind. Now let's check whether this is the one that you had thought of.

Addition of Bearish Engulfing Candle
results into a Shooting Star Candle
Source: Profit Hunter

On the left you can see a Bearish Engulfing Candle. I spoke about this candlestick pattern and its implications in my last article. When adding these two candles you have to consider the open price of the first candle to draw the new candle. The high, low and close of the second candle will become the subsequent levels of the new candle.

The new candle which is formed is called as a Shooting Star Candlestick Pattern. (Now you know why learning candlestick addition technique is so important.) The shooting star candle is equally bearish or in some sense even more bearish than the bearish engulfing candle. The shooting star takes one session while bearish engulfing candle takes two sessions to reach the same point. This indicates the might of the bears. Now let's look at some of the specifics of this pattern.

  • Pattern Specification
    • Price is in a clear uptrend

    • The real body is at the lower end of the trading range. The color of the body is not important. However, a red body is slightly more bearish.

    • The upper shadow is at least twice the length of the body.

    •  There should be no lower shadow or a very small lower shadow.

  • Who's in control?

    Price opens and trades higher as bulls continue their upward march. But before the day ends bears step in and take over control from the bulls. The prices start moving in reverse gear now. They move the prices back to the lower end of the trading range. This leaves a small body on the charts. The colour of the body isn't that important. The key point here is the long upper shadow which is atleast double the size of the body. This suggests that sellers have stepped in and will now make it a difficult task for the bulls to push prices up. A lower open on the next day confirms the shooting star candle.
Shooting Star Candle in Asian Paints on weekly charts
Source: Spider Software India

After a four week long advance Asian Paints formed a shooting star candlestick in the last week of January 2015. The bearish reversal pattern was confirmed with a gap down opening in the following week. The stock didn't dip lower immediately but the formation of the pattern was a pretty strong sign that the uptrend has come to a halt.

I would like to remind you that candlesticks are very powerful and gives us solid insights into the price action but they aren't foolproof. Like always they should be used in conjunction with other technical tools and indicators instead of using in isolation. 

Have you traded or observed a Shooting Star Candlestick Pattern before? Share your views in the Club or share your comments here.

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1 Responses to "Wish upon a shooting star"
UMESH RINDANI
26 Jul, 2015
Apurva, thanks for the write up. The explanation given is very clear and simple. Please keep sharing such good writings.Like 
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