Exhibit 8.8 shows that a doji after a long white candlestick, especially after a prolonged uptrend, is often a forewarning that a top is near. This exhibit has three examples of this concept:
In August 1989, a doji followed two long white candlesticks. After doji 1, the prior uptrend (which began with a bullish hammer from August 22) went from up to sideways.
Doji 2, in early November, was preceded by a long white candlestick. When this doji emerged, the minor rally, which preceded it, ended. Within a few days, the Dow had broken under the late October lows.
During the last few weeks of 1989, the Dow had a steep advance that pushed above the 2800 level. But look at where the rally was short circuited-after the appearance of doji 3. The fact that this doji came after a long white candlestick meant that the buyers, which were in control the prior day (as proven by the long white candlestick) had lost control. The next day’s black candlestick increased the probability that the market had crested. It also completed an evening doji star formation.
In this example, we see another strength of candlestick charting; they provide a signal not obtainable with Western technical analysis techniques. To non-Japanese technicians, if a session’s open and close are the same, no forecasting implications are taken. To the Japanese, such a session, especially at the heels of a sharp advance, is a critical reversal sign.
Exhibit 8.9 illustrates a modest rally which began with a hammer like line in mid-March (the lower shadow was not long enough nor was the real body small enough to be a true hammer), culminated with a doji after a long white line. This doji day was also part of an evening doji star pattern. An “ideal” hammer on April 6 stopped the price decline.
Exhibit 8.10 illustrates that an uptrend that thrusted bonds 7 points higher, ended with a doji following the long white real body. Exhibit 8.11 shows that a rally commenced with the hammer on April 19. It ended on April 23 when a doji appeared after a long white candlestick.
CONTINUED IN NEXT POST………………..