The stock market closed off its highs today after a strong gap higher. While the indexes finished solidly in the positive column, the soft close was clearly seen in many individual stocks. A great deal of stocks closed near their lows after pushing higher earlier in the day. The result is that many stocks formed what is commonly known as a shooting star pattern.

This pattern usually signifies exhaustion on the part of buyers and can often lead some sort of a reversal. Sometimes the reversal only lasts a few days as buyers step back in on weakness, but other times it is the canary in the coal mine signaling that something is wrong in the stock. If you think about the price action that causes this pattern, it reveals a change in momentum. Basically, longs were not strong enough to absorb profit taking after a push to new highs and were overwhelmed by the close.

A good example of a shooting star is the candle that formed on January 3 in Dollar Thrifty Automotive Group (NYSE:DTG). DTG broke out of a base to start 2012 on a high note, but reversed and closed near the open, which also happened to be near the lows for the day as well. Any trader buying the breakout at the open was quickly underwater and longs who were banking on a breakout may act to protect what profits they still have. Ultimately, it is still too early to know if this will result in a reversal or if DTG simply needs more time to consolidate. The $70 level is a key area to watch as it has been acting as resistance since December. DTG has been following the 200-day moving average since overtaking it in late November, and break under $70 would likely lead to a test of the 200-day moving average again. (For more, see The Basic Language Of Candlestick Charting.)

Cyberonics, Inc. (Nasdaq:CYBX ) had a similar reaction to its breakout attempt as well. CYBX had been flagging for the last two weeks of 2011 and kicked off the New Year with a high volume breakout. However, by the end of the day, CYBX had pushed under its open and was back within the flag. While it still maintained a positive close, it was certainly not a strong day. Traders must now watch the lows of the flag near $33 to see if CYBX is forming an intermediate top or simply extending the flag.

One of the strongest sectors on the first trading day of 2012 was the oil service stocks. This didn't stop Exxon Mobil Corporation Common (NYSE:XOM ) from forming a shooting star though. It also cleared a flag on a bump up in volume, only to close well off its highs. XOM did manage to stay above the flag and its gap, though, which was a positive. While a gap fill is likely, it is possible that XOM holds on to its breakout and continues higher. $84 is a level I would keep an eye on as a breakdown under the flag would imply a possible test of the $82 level.

Coca-Cola Company (NYSE:KO) also formed a shooting star after breaking out of a flag. KO has been acting very strongly for several weeks as it rallied from a false breakdown near $64 to break out of its base in mid December. It rallied and started flagging at the tail end of 2011 just under the $70 level. Unfortunately for bulls, KO failed to hold its breakout on its first attempt. This may simply be a case of moving too fast for KO, as it has been heading higher with little consolidation since mid December. This shooting star may simply be a warning that more consolidation is ahead.

The Bottom Line
While a shooting star or topping tail is certainly a negative or bearish pattern, it is important to note that it is not an outright sell signal. Being a simple one-day pattern, it is more of a warning sign that bulls lost the battle for that day. It often leads to either more consolidation or a more serious decline, and the important thing for a trader to note is how it behaves in the days following the pattern. If the stock can quietly trade sideways, it will often resume the breakout after resting for a few days. However, if the stock continues to see high volume selling, or more failed breakouts, then the chances of a top become much more likely. It will be interesting to see what 2012 brings, and watching how these stocks react to their opening day reversals will be a valuable clue. (For more, see Analyzing Chart Patterns.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  6. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  7. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  8. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
  9. Chart Advisor

    Watch For a Bounce in These Emerging Markets (BRF, PEK)

    While downtrends are clearly in control of the direction of many emerging market ETFs, short-term indicators suggest a bounce higher could be in the cards.
  10. Investing Basics

    Valuation Models: Apple’s Stock Analysis With CAPM

    The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center