The Dragonfly Doji Japanese CandleStick Pattern

I think that the summer of 2007 will be remembered for quite some time for its extreme volatility in most markets worldwide. An interesting result of this volatility has been the emergence of unusual technical patterns in the charts. This post will discuss one such pattern.

The dragonfly doji is related to the hammer pattern, and the high wave candle. It is the opposite of the gravestone doji. Like all doji, the dragonfly doji has a small real body. Also, this candle must have a very long lower shadow. Finally, there must be little or no upper shadow.

Ideally, the dragonfly doji forms after a long downtrend, as this is a bullish reversal signal. Here is an example of this pattern in action:


Essentially, the psychology behind this pattern is that the bears are firmly in control intra-day, but the bulls take back control of the stock (or index) and close it very close to the opening. This shows a victory of the bulls over the bears.

Here is a closer inspection of the battle that took place:



Another bullish aspect about this formation was that the bulls actually managed to close the Dow over its 200dma, which added even more bullish evidence of a reversal. By the way, I identified this pattern in real time on my main blog in this article.

The High Wave Japanese Candlestick

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Unlike all the other candles I talked about before, this formation is not bullish or bearish. This is a neutral candle, and is a single candle formation. The first rule for this pattern is that the real body must be small. Secondly, it must have a very long upper shadow, and a very long lower shadow. Finally, high wave candles generally come after a large rally, or steep decline, so that there is a lot of emotion in the air.

Below is a chart of GDX, the gold miners ETF.



Psychologically, this candle indicates that the market is confused. It shows that the bulls and the bears have waged a fierce battle, and the result is a draw, which means that sideways prices can be expected.

Notice in the above example, prices did rise after the highwave candle, but fell back down soon after. The highwave candle is not a reversal signal. However, notice a few days later, a hammer appeared, which is a reversal indicator.