Shooting Star and Inverted Hammer
The Shooting Star Pattern
The Shooting Star Signal is a one candle pattern appearing in an uptrend.
The shadow (or tail) should be at least two times the length of the body.
The color of the body is not important, although a black body has slightly more Bearish indications.
Rules:
- The real body is at the lower end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.
- The upper wick should be at least two times the length of the body.
- There should be very little or no lower shadow.
- Further confirmation is required to indicate a reversal signal. The following day needs to confirm the Shooting Star signal with a black candle or even better, a gap down with a lower close.
Signal Strengtheners:
- The longer the upper shadow, the higher the potential of a reversal occurring.
- A gap up from the previous day's close sets up for a stronger reversal move provided the day after the Shooting Star signal opens lower.
- Larger volume on the Shooting Star day increases the probability that a sell-off day has occurred and a reversal is possible.
General Analysis:
After a strong uptrend the Bulls appear to still be in control with price opening higher, but by the end of the day the Bears step in and take the price back down to the lower end of the trading range, creating a small body for the day. The long upper shadow represents that the Bears had started shorting at these levels. Even though the Bulls may have been able to keep the price positive by the end of the bar, the Bears made a good showing. Lower trading the next day reinforces the probability of a reversal.
The Inverted Hammer Pattern
The Inverted Hammer Signal is a one candle pattern appearing in a downtrend.
The upper shadow should be at least two times the length of a small body.
The real body is at the lower end of the trading range. There should be no lower shadow or a very small lower shadow.
Rules:
- The real body is at the lower end of the trading range. The color of the body is not important, although a white body should have slightly more bullish implications.
- The upper wick should be at least two times the length of the body.
- There should be no lower shadow, or a very small lower shadow.
- Further confirmation is required to indicate a reversal signal. The following day needs to confirm the Inverted Hammer signal with a black candle or even better, a gap up with a higher close.
Signal Strengtheners:
- The longer the upper shadow, the higher the potential of a reversal occurring.
- A gap down from the previous day's close sets up for a stronger reversal move provided the day after the Inverted Hammer signal opens higher.
- Larger volume on the Inverted Hammer day increases the probability that a sell-off day has occurred and a reversal is possible.
General Analysis:
The market trend was on its way down. Investor sentiment is bearish. The price opens and starts to trade higher. The Bulls have started buying at the low prices but cannot take control. The Bears keep the price down to the lower end of the trading range.
The next day, the Bulls take the price back up with little resistance from the Bears. If the price remains strong after the Inverted Hammer day, the reversal may be confirmed.
