A shooting star is a pattern in the price of an asset. It is usually found in an uptrend and suggests a bearish outlook and a potential reversal. In other words, it’s one of the reversal patterns. The pattern is on one specific period of trading, usually one day, week or month, depending on the time horizon you consider. The main tenet of this pattern is that the price moves up fueled by buying but then reverses and erases most of the move up or even the entire move up. It hints at the possibility that the buying power is drying up and that more selling is to occur.
Shooting Star in Gold
Gold, as an asset traded in financial markets, may display shooting star patterns. Let’s take a look at gold’s weekly chart from 2016-2018.
In April 2018, we see a shooting star candlestick (market with the blue ellipse). This weekly candlestick displays the classic hallmarks of a shooting star pattern: the relatively strong initial rise and the reversal erasing most of the move up. The difference between the close and the low for that week (called the “shadow”) is slightly more pronounced than is typically the case for classic shooting stars but this candlestick was a bearish sign nonetheless. And, as it turns out, what followed was the steepest decline in gold since late 2016. In this case, the gold shooting star pattern was actually the local top and a very meaningful reversal.
Shooting Star in Silver
Silver is also an asset which shows shooting star patterns. If we take a look at the weekly chart for 2018-2018, we will notice a silver shooting star candlestick in June 2018 (marked with a blue ellipse on the chart below).
At the beginning of the week, silver went up quite strongly but then reversed course, went down, erased all of the move up and even closed the week lower than it had started it. This was a relatively strong bearish indication. What followed the discussed week was an uncanny period of declines, from June to September 2018, within which the white metal went down on every single week, except one. Again, the shooting star turned out to be a quite important sign.
Shooting Star in Mining Stocks
Shooting stars are also present in the analysis of mining stocks. Let’s take a look at the daily chart featuring the GDX ETF, a proxy for the mining stocks sector.
In late January, 2018, we saw a classic shooting star candlestick in the miners. This is a particularly interesting one as the miners subsequently went higher, but only very briefly – on an intraday basis. In terms of the closing prices, the shooting star reversal marked the end of the rally and started a major short-term decline.
Shooting Stars – Critical Volume Confirmation
Shooting stars are reversal patterns and as such they should be confirmed by high volume. The volume might be average as well, but the pattern will not be as meaningful in this case. Under no circumstances, however, should the shooting start be trusted if the accompanying volume is very weak.
A tiny volume reading accompanying a reversal such as the shooting star pattern suggests that it wasn’t really a “reversal”, even though the price action may suggest so.
At first sight it may appear that technical phenomena like reversals, or breakouts etc. are just more or less random names for more or less random price movements without anything that justifies changing the outlook based on any of them. In reality, these are simple terms that refer to phenomena that are indeed happening in the market and that were found to be usually followed by some kind of action. If enough of the reliable factors are seen, the outlook may indeed change.
In the case of reversals, the thing that the single candlestick on the chart represents is the situation, in which one side (bulls or bears) attempted to push the price in one direction and got almost or mostly overwhelmed by the other side. If both forces equal each other, the price will not change in terms of daily closing prices (or weekly closing prices, which was more or less the case with gold). Now, if the price had been falling previously and we saw this kind of action, it means that the selling pressure was no longer significant enough to trigger further declines and at the same time, the buyers were stronger than previously. The implications would be bullish. Conversely, if the price had been rallying previously and we saw the mentioned kind of action, it means that the buying pressure was no longer significant enough to trigger further upswings and, at the same time, the sellers were stronger than previously. The implications would be bearish.
The key thing for the above to make sense, there really has to be some kind of “fierce battle” between buyers and sellers. If there was none, we couldn’t speak of one side overwhelming the other and thus about bullish or bearish implications. How can we tell whether one side really overwhelmed the other? By looking at the volume. High volume confirms the above as it suggests that there were high numbers of both buyers and sellers who participated in that session and low volume suggests that there are little implications of this session (in terms of viewing the reversal as important).
Shooting stars are useful bearish reversal signs, but when applying them one should remember to pay extra attention to the volume levels and also to other signs coming from the analysis of the market. Shooting stars are great to pinpoint the exact reversals moments, but unless they are confirmed by volume and the decline in prices are not likely based on other factors, this pattern may be misleading.