The TR (Trend Reversal) Signal

One of the key things to look for when planning an entry or exit of a trade is the Trend Reversal. With candlestick charting there are several candles to look for that signal a possible TR event, but all need confirmation from the following candle(s) – based on the chosen timeframe.

I found an example today when looking at the monthly chart of MA (MasterCard Inc.) showing that the current candle for August is NOT confirming the Shooting Star candle from July:

Just a reminder of the importance of a confirmation candle for the TR event to be confirmed.

More info on the Shooting Star can be found below:

From: http://www.candlestickforum.com/PPF/Parameters/16_555_/candlestick.asp

The Shooting Star

 

 Description

The Shooting Star 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. 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 very 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

  1. The longer the upper shadow, the higher the potential of a reversal occurring.
  2. A gap up from the previous day’s close sets up for a stronger reversal move provided.
  3. The day after the Shooting Star signal opens  lower.
  4. Large volume on the Shooting Star day increases the chances that a blow-off day has occurred although it is not a necessity.

 Pattern Psychology

After a strong up-trend 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

 

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