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

If you have stumbled upon this site, and you don't know what candle charts are, then click here. Otherwise, please continue reading.


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.

The Shooting Star Candle Pattern

This pattern is related to the gravestone doji formation, but is opposite to the hammer. The shooting star is a bearish reversal pattern, that comes after an uptrend. This is a one candle pattern. Ideally, the security you are looking at will be overbought.

The first rule for this formation is that on the day of the formation, the candle opens higher than the previous day's close. From there, the bulls must push prices substantially higher intraday. Then, at some point during the trading day, the bears must come out, and push prices much lower, closer to the opening of the day. Ideally, there is no lower shadow, but a very long upper shadow, and a small real body. The colour of the real body does not matter.

This marks a change of control from bulls to bears, and is a fairly reliable signal. For greater accuracy, I would suggest waiting for downside confirmation on the following day.



Notice how in the above chart, which is of the ten year yield, the price was overbought, and it was at a former high level, which indicates possible resistance, and a double top. This combined with the shooting star that formed provided three separate pieces of evidence that a reversal was likely. Bond yields play an indirect role in the price of gold.

Bullish Engulfing Candlestick Pattern

In my previous post, I said to the person who commented that I would show a copper chart soon. At the same time, I also wanted to show an example of the bullish engulfing pattern, which I had not covered yet. Luckily, I will be able to kill two birds with one stone in this post.

Below is a chart showing the daily price action of Red Gold. The bullish engulfing pattern is circled in blue. Please click on the chart to get a larger view.


This is a pattern involves 2 candles, and here are the rules for a bullish engulfing candle. First, the price must be in a downtrend, as this is a bullish reversal pattern.

Secondly the first candle of the pattern must be red, and must be long, which indicates that the bears are in control. Ideally, this red candle will close near the lows for the day.

Third, the second candle in the formation must open below the previous day's low, and close above the previous day's high. Ideally, the second candle will close near the highs for the day, indicating total victory for the bulls. In this way, the second candle completely envelops the first candle. This marks a change of control from bears to bulls.



The above image shows a magnified view of what happened. This bullish engulfing pattern was not perfect, as the second candle only wrapped around the real body of the first, and not the wicks as well.

The red line, in the image above, represents the 200dma, and notice how the price descended down to this line, but stopped cold at this point. This was not a coincidence, as there were many traders waiting with buy orders at this level. I have seen this happen time and time again. It makes me wonder how some people still think that market prices are completely random.

Tall Open Candle Stock Scan

Once you gain a basic understanding of candles, and the pyschology behind them, it becomes clear that some individual candle lines are extremely bullish. The problem is that if you are just looking at your favourite stock, special candle formations may come about only once in a blue moon.

This problem can be aleviated through using stock scans. The website, www.stockcharts.com, which is where all my charts originate from, also has a very powerful stock scanner. In this post, I will show you how we can scan through thousands of stocks and pick out a couple that meet our criteria.

This post will involve a scan that is very simple, but also highly potent. I have taken a screen shot of StockCharts stock scanning setup:



What we are trying to do is find a stock in North America that, for the day, experienced a large increase, with heavy volume, and closed on the high of the day. This candle would be tall, white, and have shaved head. In my opinion, this is an extremely bullish combination.

So, if you look at the above image, at what I have marked off as line 1, what this says is that the high zero days ago (today) is equal to the close today. This is the shaved head part of the equation.

Line 2, just says that we do not want stocks that are overbought. We want stocks that have a 9 period RSI of less than 70.

Line 3 says that we want the close to be greater than the open for today. All this means is that the stock needs to have risen today. And it needs to this by a factor of 1.02, which means that the stock must have risen by 2% or more on this day.

Finally, line 4 says that we want the stock's volume for today to be twice as much as the 50 day moving average of volume. Basically, we want heavy volume for this day.

When I ran this scan a couple weeks ago, it picked out the following stock, and I'll show a chart of it now.




I have drawn a circle around the candle the scan isolated. As you can see, it was indeed tall, it closed at the high of the day, and the volume was heavy. This meant that the bulls were clearly in control on this day and that higher prices would likely follow. Another aspect of the chart that I like, and the scan had nothing to do with this, is that the stock is in an uptrend. That is worth a lot of points in my books.

Although this scan does not really have anything to do with gold stocks, I think it is important hold some stocks that are not gold related. This scan has helped me add stocks to my brokerage account that are not correlated to my gold stocks holdings, so it helps reduce some risk. Anyway this post was quite long and went through a lot of information, and I hope it made sense. If not, send me an email.

How To Read Candlestick Charts

I hope this video supplements what I have written.

Morning and Evening Star Candle Formations

These two formations are quite rare, but when they do occur, they tend to be very powerful. These Japanese patterns are similar to what you may know as an island reversal. If you don't know what an island is, then this post will be especially useful for you.

Let's start off with the morning star. This formation is a bullish reversal pattern, and comes after a lengthy downtrend. Another key point is that this formation usually has 3 candles, although my examples have 4. The first candle should be red, indicating that the bears are in control. The second candle must gap down. Gaps are know in Japanese technical analysis as windows, but I will call them gaps. Anyway, by gap down, I mean that the second candle's high must be lower than the previous candle's low, creating a void or empty space between the first two candles.



At this moment, there is nothing bullish about what I am describing, since the fact that the price gapped down is a very bearish indication. However, here is where it starts to get bullish. The third candle must gap up. I prefer it when the low for the third day is higher than the high on the second day. In english, this means that, again, there is a space between the second and third candle. The result of all this is that the second candle is completely abandoned on the chart. This formation is so powerful because it basically shows that the market has totally rejected the price action that occurred on the second candle, or the island.

The evening star is the exact opposite formation, and comes after a long up trend. Please refer to the above chart for an example. To get the rules for an evening star, just take the rules I just mentioned for the morning star and reverse them.

The above chart is of XGD, which is a gold stocks ETF that trades in Toronto. The first example shown was a morning star formation, with a textbook like island forming right at the bottom. If you have trouble reading the comments, then click on the image to see a larger view. The second example shows an evening star. Notice how there are 2 gaps needed for this formation, so that an island is created. If you look at the above chart, there is no other time this formation occurred, which shows that these are in fact quite rare, but as I hope you can see, also very powerful formations.

The Gravestone Doji Candlestick Pattern

One thing I like about Candlestick charting is the colourful names associated with many of the patterns. As you could probably guess by the name of this pattern, the gravestone doji is a bearish pattern.

To begin, let us define what a doji is. The word doji comes from an ancient Japanese word that basically means knife. Essentially, a doji is simply any candle where the opening price is equal to, or very close to equal to the closing price. This results in a very narrow real body, that does in fact look like a knife if you use your imagination. This shows that the bulls and bears have battled it out, and at the end of the day, the result was a draw between the two.

Doji are more important after long up trends or downtrends. But contrary to popular belief, they are not a particularly bullish or bearish signals. They just mean that the bulls and bears are at equal force, and the trend may reverse or trend sideways. In other words, doji represent a tie between bulls and bears, and not a victory.

The gravestone doji is a stronger signal. Ideally, the gravestone doji will appear after a long uptrend, and the chart will be overbought in terms of RSI. The bulls, who are in control, push the price significantly higher in mid session. Then, the bears come out, and begin dominating the bulls, and close the price very near the opening. This results in a long upper shadow, and small real body. Optimally, there is no lower shadow. Please refer to the chart below for an example of this.




Furthermore, this candle represents that the bulls have lost control, and the up trend is in serious jeopardy. In the above weekly chart of the XAU, both these gravestone doji forecasted massive declines in the index. Remember, candle patterns work for any time frame, but the patterns that appear on longer term charts are usually more powerful as this weekly chart demonstrates.