A Shooting Star Forecasts Dollar Weakness

Although the dollar traded fractionally lower on the day, it is the highs achieved today along with the inability to sustain those new price highs that created a single day candlestick known as a shooting star.

This candlestick is a member of the umbrella group of patterns, which contain the hammer, hangman, inverted hammer, and shooting star. The hammer and hangman, as well as the shooting star and inverted hammer, are identical in composition. They are differentiated by whether or not they occur after a defined uptrend or defined downtrend.

A shooting star is interpreted as a type of reversal pattern presaging a falling price.

A shooting star and hangman occur after the market has been in a defined uptrend. If these candle types are identified after a correction, they are called an inverted hammer and a hammer.

There are two primary factors needed to create this candlestick type. First, this candlestick must contain a tiny real body (differential between the open and closing price). Secondly, there needs to be a considerable distance between the daily high and the open and closing range, with the tail at least three times the length of the real body.

According to Investopedia, “Shooting stars indicate potential price tops and reversals. The shooting star candle is most effective when it forms after a series of at least three or more consecutive rising candles with higher highs. As the price rises, buyers get impatient waiting for a pullback, and leapfrog over one another to purchase shares. Eventually, the buying frenzy hits a peak as the last of the immediate buyers jump into the stock (or any financial instrument) in a greed-driven panic to mark the highest high of the preceding series of candles.”

It is precisely this Japanese candlestick type that resulted from today’s trading activity. It meets the criteria in that it occurred after a defined and sustained uptrend. The fact that this candle was found at the 50% retracement is also significant. As such we could very well see the dollar’s value begin to decline over the next couple of weeks.

Wishing you as always, good trading,