Gravestone Doji and Head and Shoulders Tops?
What is a Doji?
A Doji is a candlestick pattern where the candle has the same opening and closing.
Although many Doji candlestick patterns have no body, it does not matter if there is a small body compared to no body in the candlestick pattern.
Remember, one Doji candlestick pattern does not necessarily reverse a dominant and prevailing trend. Often traders are too aggressive and make the mistake of shorting after witnessing a single Doji candlestick within an uptrend. In most cases, the trend will continue in the same direction.
A Doji often signals indecision in the market, pitting the bulls against the bears. It is a temporary trading indecision rather than a sustainable trend reversal.
There are variations of a Doji. The three popular Dojis are Dragonfly Doji, Long-legged Doji, and Gravestone Doji).
Dragonfly Doj - is a sign of strength or bullish tendencies. The close and the open are at the same levels. But the difference is that 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 – is 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.
A Gravestone Doji occurred on the SPX Index (SPX) on 3/6/23. 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 that is indecisive to bearish.
However, 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 the Jan 2022 primary downtrend resuming. It could also signal a shift toward a neutral sideways trading range trend. A high volume is more reliable than one with a low volume.
The high established on the day of the Gravestone Doji (4,078.59 – 3/6/23) is crucial to deciding the next directional trend. If the rally stalls near a formidable resistance, it is significant. During the Mar 2023 recovery, SPX faded at pivotal resistance near the Dec 2022 highs (4,100.51/4,100.96), the 2/17/23 gap-down (4,081.51-4,089.49), and extension of the Oct 2022 uptrend breakdown (4,062).
Today (3/9/23), a negative outside day pattern developed as SPX closed below its 200-day ma (3,941) and the 3/2/23 low (3,928.16).
Two head and shoulder patterns have also developed in recent months. The smaller h/s top is from Jan 2023, and the larger one is from Nov 2022. Both distribution top patterns warn of selling pressures.
Violation of neckline support at 3,928 confirms a smaller head and shoulders top, suggesting -309.9 points or an SPX downside target of 3,618.
Intermediate-term support remains at 3,760.5-3,795 (neckline, 12/22/22 higher low, and the 61.8% retracement from Oct 2022 to Feb 2023 rally). A breakdown below 3,760.5 confirms a top and the next SPX selloff toward 3,491.58 (10/13/22 pivotal market low) and below this 3,344 (h/s top breakdown projection).