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Double Doji Candlesticks

Bullish sentiments have returned to stocks after the Federal Reserve pivot announcement of the benchmark rates at last week’s FOMC meeting. The Fed’s projection of at least three rate cuts totaling 0.75% next year sent yields tumbling lower and renewed interest in stocks and other financial assets.


Investors believe the Fed will be successful in taming stubbornly high inflation and achieving a soft landing without pushing the U.S. economy into recession.


Whether the Fed will be successful in its attempt at a soft landing in 2024 may depend heavily on various factors, including the number of rate cuts, inflationary pressures, economic conditions, geopolitical events, and the U.S. Presidential Election in the coming year.


After an explosive stock market rally after the Federal Reserve’s FOMC meeting last Wednesday, December 13, the S&P 500 Index (SPX) generated a doji chart on Thursday. It was soon followed by a similar doji formation on Friday, coinciding with triple witching expiration.


A single doji candlestick is a rare chart occurrence, suggesting market indecision as neither the bulls nor bears are in control. Having two consecutive doji candles is extremely rare and warns of significant market indecision.


The double doji signals a temporary trend pause and a potential sharp reversal of the existing trend. The first candle represents market indecision, while the second doji reaffirms this indecision.


A doji pattern represents a cross on the chart, showing the opening price and closing price are close to each other. Double doji can consist of any combination of any four different types of doji candlestick patterns – doji (neutral), long-legged doji (depends on f doji occurs after a prolonged uptrend or downtrend), gravestone doji (bearish), and dragonfly doji (bullish).


The significance of two consecutive doji candlesticks trading in the same direction depends on the prevailing trend. The wicks of the doji also show equal-length vertical lines on either side of the day’s trading range.


Suppose the double doji appears in an upward trend accompanied by bearish indicators (i.e., overbought conditions, lack of market breadth, negative divergence in price momentum, etc.). In that case, it can lead to a bearish reversal. However, if a double doji appears in a downward trend with bullish indicators, this can lead to a bullish reversal.


In conclusion, a double doji candlestick is extremely rare, typically occurring in a volatile market with sharp price actions, signaling market indecision. If the pattern occurs at the top of a prolonged uptrend, it warns that the bulls may be tired, and a possible reversal of the existing trend is imminent.


Will a near-term market pullback alleviate an overbought condition, leading to the resumption of the long-term structural bull?


Source: Chart courtesy of StockCharts.com


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