The Shooting Star
The Shooting Star signal is found at the top of an uptrend.
In order for the Bearish Engulfing signal to be valid, the following conditions must exist:
1.The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart.
2. The Upper shadow must be at least twice the size of the body.
3.The day after the Shooting Star is formed, one should witness continued selling.
4.There should be no lower shadow or a very small lower shadow. The colour of the body does not matter, but a black body would be more positive than a white body.
The following Figure shows a Shooting Star formation. During the day of the formation, the bulls had complete control of the trend. However, smart money started selling into the exuberance. That leads to the long upper shadow for that day. What does this do to the psychology of the bulls? They are in two minds now about the strength of the trend. They are aware of the fact that the stock is in extended overbought territory. They hold on waiting for the next day to test the bear’s persistance. If the bears manage to close the stock lower the next day, the bulls will generally step away and the uptrend will reverse.
Following chart of ADS shows a classic Shooting Star formation. The bears managed to close the stock lower on the following day and the reversal was confirmed. Note that even though the two candles prior to the Shooting Star had long upper shadows, they do not qualify as Shooting Stars. The reason being, their upper shadows are not at least twice the length of their bodies. The Japanese have placed great emphasis on this fact. Just be careful about these subtleties!