The shooting star candlestick formation is commonly interpreted by traders and market analysts as a bearish signal of market reversal. This formation appears at the end of an uptrend, either long-term or intraday. The shooting star is one of the more visually arresting candlestick patterns since its mere appearance looks very starkly like a downward signal. It forms with an open that gaps higher than the close of the preceding candlestick. Initially, price continues to rise substantially higher, but then turns back downward so the final appearance of the candlestick is one with a very short body, a very long upper shadow, at least twice as long as the body, and virtually no lower shadow. The closing price is the same as, or very near, the opening price.
The shooting star candlestick is identical in appearance to a hammer candlestick formation and is sometimes referred to as a "hammer down." It is only distinguished by where it occurs in an overall chart pattern. The hammer pattern occurs at the end of a downtrend, while the shooting star occurs at the top of an uptrend.
Traders and analysts consider the shooting star a distinctly bearish signal because its formation, from open to close, portrays a sharp shift in momentum. The gap open above the previous candle indicates strong buying momentum, as does the initial continued substantial rise in price. The close of the candle displays a virtual evaporation of all buying momentum, accompanied by a strong push down on the part of sellers.
Factors that strengthen the bearish market reversal indication are:
- If the preceding candle is an up candle with a long body that closed relatively near its high, this is considered a stronger confirmation of the pattern, because the shooting star candlestick that follows is such a radical change.
- The higher the gap open from the preceding candle, the more strongly bearish the interpretation.
- A longer upper shadow also strengthens the interpretation, as this shows a larger range where the market rejected higher prices.