SHOOTING STAR AND INVERTED HAMMER

SHOOTING STAR

Description

The Shooting Star in Figure 2.45 is also comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an uptrend. The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.

Criteria

• The upper shadow should be at least two times the length of the body.
• 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.
• There should be no lower shadow or a small lower shadow.
• The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

• The longer the upper shadow, the higher the potential of a reversal occurring.
• A gap up from the previous days close sets up for a stronger reversal move provided.
• The day after the Shooting Star signal opens lower.
• Large volume on the Shooting Star day increases the chances that a blowoff day has occurred although it is not a necessity.

Pattern Psychology

After a strong uptrend has been in effect, the atmosphere is bullish. The price opens and trades higher. The bulls are in control. But before 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. This could indicate that the bulls still have control if analyzing a Western bar chart. However, the long upper shadow represents that sellers had started stepping in at these levels. Even though the bulls may have been able to keep the price positive by the end of the day, the evidence of the selling was apparent. A lower open or a black candle the next day reinforces the fact that selling is going on. (See Figure 2.46.)

INVERTED HAMMERS

Description

The Inverted Hammer in Figure 2.47 is comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. Found at the bottom of a downtrend, this shows evidence that the bulls started to step in, but that the selling was still going on. The color of the small body is not important but a white candle has slightly more bullish implications than the black body. A positive day is required the following day to confirm this signal.

Criteria

• The upper shadow should be at least two times the length of the body.
• 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.
• There should be no lower shadow or a very small lower shadow.
• The following day needs to confirm the Inverted Hammer signal with a strong bullish day.

Signal Enhancements

• 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 hammer signal opens higher. 
• Large volume on the Reverse Hammer day increases the chances that a blowoff day has occurred.

Pattern Psychology

After a downtrend has been in effect, the atmosphere is quite bearish. The price opens and starts to trade higher. The bulls have stepped in, but they can't maintain the strength. The existing sellers knock the price back down to the lower end of the trading range. The bears are still in control. This is an unusual signal. It has the aspects of being a bearish signal. But the next day, the bulls step in and take the price move back up without major resistance from the bears. They had used up their resources during the previous day's selling. If the price maintains strong after the Inverted Hammer day, that confirms the signal. (See Figure 2.48.)