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Another Gravestone Doji?

Candlestick charting is one of the oldest of all technical analysis disciplines. Candlestick charts originated during the 18th century by Munehisa Homma, a Japanese rice trader. Steve Nison popularized the technique to the Western world in his 1991 book - Japanese Candlestick Charting Technique.

Japanese Candlestick chart displays four data points – open, close, high, and low prices. There are forty-two (42) simple and complex patterns, including Spinning Tops, Marubozu, and Dojis.


It sounds like voodoo magic, but the technical discipline works and has withstood the test of time.

What is a Doji?


A Doji is a popular candlestick pattern where the candle has the same opening and closing.


Doji does not necessarily indicate an impending reversal of a dominant trend. Often traders are presumptuous, shorting after the occurrence of a single Doji candlestick within a dominant uptrend. In most cases, the trend will continue in the same direction as the prevailing uptrend.


Nonetheless, a Doji is still a meaningful pattern. It denotes short-term indecision in the marketplace, pitting the bulls against the bears. It is often a temporary indecision rather than the start of an intermediate-to-long-term trend reversal.


There are three variations of a Doji – Dragonfly Doji, Long-legged Doji, and Gravestone Doji.


Dragonfly Doj - A sign of strength or bullish tendencies. The close and the open are at the same levels. The difference is the candle has a lower wick. The wick suggests rejection of lower prices. Buyers stepped in and pushed the price back up, closing at the open and high for the day. Some will recognize this pattern as a variation of a Hammer.


Long-legged Doji - Like the normal Doji, the open and close are at the same level. However, the upper and lower wick is typically long or very long. It implies significant indecision in the market. The pattern often occurs when the market reacts to an unexpected news release.


Gravestone Doji – A sign of weakness or bearish tendencies. Same as the other Dojis. The difference is that it has a long upper wick as the market rejects higher prices. When the market opens, the buyers have the upper hand. Then the sellers take over and push the price down to a close near or at the open. The pattern suggests a rejection of higher prices.


To confirm the reversal, look for confluence at levels that offer significant selling pressure or crucial resistance. Some will call this a variation of a shooting star. The pattern is considered bearish and does not depend on whether it appears on an uptrend or downtrend. Many traders view this as a market environment that is indecisive to bearish.


Studies have shown that it is only accurate 51% of the time. It suffers from the same reliability issues as many other candlestick patterns. It needs the next few candles to confirm the reversal.


In the days following a Gravestone Doji, if the market weakens, it increases the odds of a correction or decline. It could also signal a shift toward a neutral sideways trading range trend or another basing market environment. A high volume is more reliable than one with a low volume.


A Gravestone Doji occurred on the SPX Index (SPX) and other market indexes on 3/6/23. The high established on the day of the Gravestone Doji (4,078.59 – 3/6/23) is crucial to deciding the next short-term trend. If the rally stalls near a formidable resistance, it is significant.


During the early-Mar 2023 recovery, SPX faded near pivotal resistance along the Dec 2022 highs (4,100.51/4,100.96), the 2/17/23 gap-down (4,081.51-4,089.49), and the extension of the Oct 2022 uptrend breakdown (4,062). Selling soon resumed after the onset of the Doji, reaffirming a near-term reversal as SPX quickly declined to 3,808.86 (3/13/23) in five trading days.


Yesterday on 5/1/23, Gravestone Dojis developed in SPX, INDU, NYA, MID, and SML. Surprisingly, the two technology-laden indexes, COMPQ and NDX, did not record Gravestone Dojis. Does this imply relative strength from COMPQ and NDX, at least on a near-term basis?


The last Gravestone Doji on 3/6/23 led to a 5-day correction of -6.61% to 3,808.86 and the start of the Mar-Apr 2023 rally. The next few days will help decide the extent of the correction. Will a shallow, modest, or deep correction develop in SPX?


Initial support is 4,036 or -3.61% to the 50-day ma. Secondary support is 4,968 (200-day ma) or -5.23% correction. Pivotal support is 3,837 (Nov 2022 uptrend) or -8.36% correction.


Key SPX initial resistance is 4,186.92/4,195.44 (2/2 and 5/1/23 highs). A breakout signals the resumption of the rally and renders the next target at 4,308-4,325 (late-Apr/May and Aug 2022 reaction highs).


Source: Chart courtesy of StockCharts.com


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