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  • Kodiakbull Kodiakbull Nov 12, 2002 4:15 PM Flag

    Stop the insanity!


    All the wizards of "bottom line" fundamental analysis may skip this post.

    Although Morris implies (page 52) that a doji pattern is a reversal pattern (requiring confirmation) the Stockcharts squib on it has a better grasp of the indicating power of a doji:

    "Doji are important candlesticks that provide information on their own and also feature in a number of important patterns. Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word "Doji" refers to both the singular and plural form.

    Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing."

    It's a standoff, the pause which refreshes, and just as likely to be a continuation pattern as a reversal. The key, of course, is to analyze carefully where it is in the overall price action and, most importantly to look to volume and other indicators for confirmation of the direction.

    And, regrettably, this is all true regardless of the p/e of the underlying stock. Go figure.


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