DON'T GET WOUNDED BY THE SHOOTING STAR CANDLE

We've devoted several issues of our Swing Trader newsletter to a description of a number of major reversal candles. If you are a regular reader, then you should be able to identify and integrate at least ten candles into your swing trading analysis.

These candles are the four kinds of dojis (common, long-legged, gravestone and dragonfly), hammer and hangman, bearish and bullish engulfing, dark cloud cover and piercing.

Failure to spot these key candles can lead to costly trading errors. Why should you be able to identify these candles? Because they can make you money. Before you read the rest of this column, I suggest you take the following simple test. List the ten candles above and draw a small diagram of each candle next to its name. (If you missed any of our previous discussions of these candles, you might want to review these lessons in our educational archive).

The last of the major reversal candles is the star. Candle theory identifies four kinds of stars: morning, evening, doji and shooting. In this column, I want to focus exclusively on the shooting star.

The shooting star can only appear at a potential market top. If you are looking at a daily chart, then it is possible that this candle will warn of a reversal in the Minor uptrend. Since a minor uptrend typically lasts between six and fifteen days, the swing trader should be very alert if the Minor uptrend is mature.

In order for a shooting star to occur, the candle before it should have a large real body. The day the shooting star occurs, the market should ideally gap higher (although with stocks rather than commodities, this gap is sometimes not present).

The stock should then rally sharply. At this point, it appears as though the longs are in complete control. Sometime during the day, however, profit taking ensues. The stock closes near the unchanged market, as shown by a small real body. A shooting star therefore has a small real body and a large upper shadow. Typically, there will be either no lower shadow or a very small one. Here is a graphic representation of a shooting star candle:

The small real body shows that the bulls and bears are at war with each other. Whereas the bulls had been in control during the uptrend, the two sides are now evenly matched.

The historical chart for Albertson's (ABS) below provides us with a good example of a shooting star candle. In late October, ABS bottomed at $19.20. The shares then entered into a Minor uptrend. This took the stock back to $20.50 by the end of the month. A sideways consolidation saw Albertson's make a second bottom at $19.50 in mid-November.

From there ABS rallied sharply, hitting an intraday peak of $21.74. A more than $2 gain is a strong move for this stock, which usually is not volatile. On the day of the peak, the circled shooting star candle occurred. This candle was made more important by several factors. First, the stock had already peaked in the $21.60 range on two previous occasions and the shares were up against strong resistance. Second, the shooting star occurred outside the Bollinger band and the CCI indicator confirmed the shares were very overbought. Third, the Minor uptrend was in its eighth day, and was therefore becoming mature.

The shooting star was followed by a small bearish engulfing candle, implying that the Minor uptrend had peaked. The alert swing trader should have taken profits at that point. In the following days, ABS moved lower and then headed sideways for several sessions.

If you can accurately recognize the shooting star candle, then you'll have another important tool to assist you in spotting early signs of a reversal. The candle will warn of the end of a Minor uptrend before trend following tools such as moving averages or MACD. Recognize the shooting star or suffer the slings and arrows of stock market misfortune.

Good trading!

Dr. Melvin Pasternak
Editor
The StreetAuthority Swing Trader

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