Most traders are familiar with candlestick charting and particularly the commonly found “doji” candle. The classic doji is characterized by a narrow opening and closing range or real body, which is situated in the center of a wide overall range.
There are other variations of the doji candle like the “gravestone” which has its real body located at the bottom of the overall range and has a long upper shadow or wick. The real body of the “butterfly” doji is positioned at the top of the overall range with a long lower shadow or tail. In any case, the doji candle reflects indecision about the future direction of a stock, and suggests that an existing trend may be nearing a turning point.
In Friday’s strong session there were a surprising number of doji candles that appeared on a wide range of stock charts. Here are three of the more notable one.
Alphabet (GOOGL) shares gapped up over 4% on the open, taking out long-term channel resistance. It was up another 3% at its high of the day, but closed back down near its opening price forming a high-wick doji candle.
Volume spiked and the volume bar indicated that volume was to the buy-side. The accumulation/distribution line, however, measures buying or selling pressure differently and it indicated that the initial buying was overcome by selling pressure.
These conflicting money flow readings only add to the inherent indecisiveness of the doji candle. Follow-through confirmation is required before calling an end to the intermediate term trend.
Shares of Microsoft (MSFT) gapped 7% higher at the open on Friday. They continued higher intraday but pulled back to close below their opening price, forming a gravestone-like doji candle.
The same money flow conflict we saw on the Alphabet chart is in place on this chart, and the stochastic oscillator indicates the stock has been overbought for about a month.
One additional problem with the Alphabet and the Microsoft charts are the large gaps that preceded the doji candles. Traders know the expression “gaps need to be filled,” and when they are followed by potential reversal candles, they are often filled quickly.
Two consecutive doji stars formed on the Walmart (WMT) chart at the end of last week. Multiple dojis have formed on this chart in the past but last week’s stars are being followed, at this point in today’s session, by a large dark down-day candle. This would be follow-through price action, which all individual candles and candle formations require before their particular signals can be considered confirmed.
There was little volume one way or the other associated with recent price action, and the stock looks like it is reversing, possibly headed back down to close the October gap.