The “doji” (meaning the same or no change in Japanese) can be one of the most important candlesticks when viewing charts. It indicates that buyers and sellers are at equilibrium, a state of indecision and balance. Equality never persists as eventually one side will win, as such investors should desire to be on the side of the winner. When doji’s appear at the end of an extended trend (either up or down) they have the potential to be a significant warning that the near-term trend may be ending. The Japanese (who created candlestick charting) say that whenever a doji appears, investors should always take notice.
The doji is formed when price opens and the closes at or very close to the same level. In candlestick charting, this essentially creates a “cross” formation. As the illustration below shows, doji’s take on many shapes but all have the same important implication and contain two common elements. A horizontal line which represents the open and close (occurring at or near the same level) and 2) a vertical line representing the total trading range (high and low) during the time period represented on the chart.
Below is a chart of the US Dow Jones industrial index. As you can see, the industrial’s price is approaching the high levels made last November. What should also be clear is that a doji formed Monday. I ask you to let your eyes drift left and look at what happened each time a doji (circled in blue for your convenience) occurred in an extended uptrend. Do you see a pattern that repeats? If so, we all must be wondering if it is finally time to take a breather from this over-extended counter trend bounce off of last Christmas eve’s low prices and expect a pullback? Or will this uptrend be strong enough to overpower the return of the doji?