Pattern review “Shooting star”July 20, 2018
The shooting star is one of the most popular candlestick chart patterns. This model is used in the technical analysis of many traders both the newbies and the professional ones. This pattern consists of the long upper shadow, which should be twice bigger than the candle body, the bottom shadow is small or no shadow at all. The pattern can be both bullish or bearish (pic 1) and can be seen only as a part of an uptrend (it cannot be used in consolidation or side market movement).
First of all, the shooting star is the reverse pattern and it needs the additional confirmation candle. However, the situation may look a bit different when applied. One of the confirmations of the further downtrend movement is the formation of the bearish candle that closes below the previous one (pic 2)
It is important as the bearish turn itself is the sequence of candles where the next candle closes below the previous one. The bigger the size of the body, the stronger and more confident the market movement will be, the big body will be the stronger bearish signal than the small one (pic 3).
The beginning of the downtrend formation can start with a bounce to the level of the shooting star formation, if the market does not break this resistance and continues to fall, we get the double top pattern, where the next top cannot be higher than the first one (pic 4 and 5).
Also, it is important to remember, that the support and resistance zones work as the zones, not like the exact level!
In order to identify the change of a trend more sharply, we should pay attention to the possibility of a top to demonstrate the bearish divergence (pic 6). The divergence between the price movement and the information from the indicators is an important fact in reverse formation. In the example (pic 6) the next top of MACD is lower than the first one while the tops on the chart with the price look different. The point is that the lower lows of MACD are the early symptom of the impulse weakening and the end of the growth. In addition to the bearish candlestick pattern, the loss of impulse increases the possibility of reversal. Any indicator can show the divergence (we showed the example on MACD), don’t make the conclusion using the information of one indicator, always make the global analysis. Also, want to point out that it is important to prioritize timeframes. The higher timeframes you use, the more important the divergences and the patterns are. The day timeframes are of a high priority if to compare with the hour or minute timeframes. The minute timeframes can help show the moment of the reverse, however, they can be fake often, you should always look at the higher timeframes and compare. Don’t use only one indicator or a timeframe in tour analysis, it is correct when you use the complex analysis of different timeframes and most of the indicators.