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June 1, 2022
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Reversals: Doji Star and Shooting Star
by Adam Oliensis

A Doji star is among the more potent of the Star formations. When candle #2 is a Doji it adds to the importance of the pattern. Why? The Doji, with identical or virtually identical opening and closing prices, indicates that the standoff between the bulls and the bears is completely balanced. The dynamic tension in the conflict is maximal. And a Doji on high volume adds even more tension into the situation.

The chart below shows a bearish Doji star and a bullish Doji star. These are just versions of the bearish evening star and the bullish morning star, with essentially the same dynamics.
image
Next, we will cover the shooting star. A shooting star is perhaps the most powerful variation of the theme. What distinguishes this formation is a gap between candles #2 and #3.

The white band on each of the charts below show you the gap between candles #2 and #3 in the 3-candle pattern. So we have a gap between #1 and #2, and then another gap between #2 and #3. That makes candle #2 an “island.” So the shooting star is an island reversal, which is a well known pattern in Western Technical Analysis, and is extremely powerful. Candle #2 in this formation is “abandoned” by the prior and subsequent market activity. That is, the gaps on either side of #2 are quite meaningful. The gap between #1 and #2 is the market’s last, exhausted gasp in the direction of the trend. The gap between #2 and #3 is the market’s resounding rejection of the prices achieved by that last gap. The market races away from #2 as fast as it can, with its tail between its legs, and leaving its weapons in the field. In an uptrend, the shooting star now represents formidable resistance. In a downtrend, it represents a strong support level.
image
A two-star formation does not always become a three-day reversal pattern. So stay on your toes! It’s an alert that the three-day formation may be coming.

Below we have a prime example of a Doji star with potentially bullish implications (#2). And it’s a long-legged Doji, which should make it quite powerful. The conflict between bulls and bears ranged all over the battlefield on day #2, with each side gaining and losing large advantages. That could have “freaked out” the bears, as they had profits to protect from the prior downtrend. But on the following day (#3), we did not see the bears exhausted. Quite the contrary. The battle raged on the same field (price range) as it had the prior day. But in the end, the bulls caved in and retreated, with the stock closing near the session low.
image
So, what happened? Did the Doji star lie? No. The Doji star was a warning. The market could make no further downside progress that day, and that opened up the question of whether the tide might turn from bearish to bullish. But if you’d gone long on that two-day Doji star, you’d have been disappointed. Day #3 did not confirm the Doji as a reversal candle, but rather told us that the bears were still essentially in control, though meeting some resistance. Once the low of the Doji candle was penetrated, further downside continuation was in the cards.

This chart illustrates the importance of two things: First, if you trade on what might be a tentative reversal signal, you had better be careful, and you’d better not wed yourself to the reversal you expected. If the market tells you that the reversal just isn’t happening, then listen to it. Second, it’s important to know the difference between a preliminary, or warning signal on the one hand and a confirmed reversal signal on the other hand.

There are a whole variety of trading models and techniques. But the one thing they all have in common is that, to do them well you must remain open to what the market tells you. It’s very dangerous to have too much conviction in one direction if the market is giving you evidence to the contrary. So… if you’d gone long the Doji on an expectation of a reversal, you’d better have had a firm target before you went into the trade identifying where you would cut your loses if you were wrong.

 
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