When a doji gaps above a real body in a rising market, or gaps under a real body in a falling market, that doji is called a doji star. Exhibit 5.2 shows doji stars. Doji stars are a potent warning that the prior trend is apt to change. The session after the doji should confirm the trend reversal. Accordingly, a doji star in an uptrend followed by a long, black real body that closed well into the white real body would confirm a top reversal. Such a pattern is called an evening doji star (see Exhibit 5.13). The evening doji star is a distinctive form of the regular evening star. The regular evening star pattern has a small real body as its star (that is, the second candlestick), but the evening doji star has a doji as its star. The evening doji star is more important because it contains a doji.
A doji star during an uptrend is often the sign of an impending top. It is important to note that if the session after the doji star is a white candlestick which gaps higher, the bearish nature of the doji star is negated.
In a downtrend, if there is a black real body, followed by a doji star, confirmation of a bottom reversal would occur if the next session was a strong, white candlestick which closed well into the black real body. That three candlestick pattern is called a morning doji star (see Exhibit 5.14). This type of morning star can be a meaningful bottom. If, during a downtrend, a black candlestick gaps under the doji star, the potentially bullish implications of the doji star is voided. This is why it is important to wait for confirmation in the next session or two with doji stars.
If there is an upside gap doji star (that is, the shadows do not touch)followed by a downside gap black candlestick where the shadows also do not touch, the star is considered a major top reversal signal. This is called an abandoned baby top (see Exhibit 5.15). This pattern is very rare!
The same is true, only in reverse, for a bottom. Specifically, if there is a doji star that has a gap before and after it (where the shadows do not touch) it should be a major bottom. This pattern is referred to as an abandoned baby bottom (see Exhibit 5.16). It is also extremely rare! The abandoned baby is like a Western island top or bottom where the island session would be a doji.
Exhibit 5.17 shows that a doji star in early June halted the prior price decline. It is still called a star although the shadow of the doji star bottom overlaps the prior day’s black real body. When the white real body appeared after the star, confirmation of the downturn was over. The black real body before and the white real body after the doji star made this three-line pattern a morning doji star.
On the doji star candlestick of Exhibit 5.18, prices broke under $35.This was a support area from early in July. The fact that the new lows could not hold is considered bullish. Add to this the morning doji star pattern and you have two reasons to suspect a bottom.
Exhibit 5.19 is an example of both an evening doji star and a regular evening star. Price action from March through May 1986 formed an evening doji star. This pattern halted a sharp rally which began just a few months previously. A selloff ensued after this evening doji star. It ended with the bullish engulfing pattern. The rally from that engulfing pattern topped during the evening star pattern of mid-1987.
In Exhibit 5.20, we see the three lines that form the evening doji star on March 17, 18, and 19. This pattern ended the rally that began with a hammer the prior week. This example again shows that certain candlestick configurations should have more latitude in the equity market. This is because, unlike futures, stock prices may open relatively unchanged from the prior close. This means that specific patterns that relate the open to the prior day’s close may have to be adjusted for this fact.
In the case of Dow Chemical, note how the evening doji star was not a true star. A doji star’s real body (that is, its opening and closing price)should be over the prior day’s real body. Here it was not. Therefore, allow more flexibility with candlestick indicators with equities. For those who monitor the equity markets, as you experiment with candlestick
techniques, you should discover which patterns may have to be modified.
In Exhibit 5.21, one can see that a few weeks before 1987’s major sell off, an evening doji star top arose. The center candlestick of this pattern (the doji star) did not gap above the prior white candlestick as should a true star. However, as discussed in Exhibit 5.20, one should allow more latitude with this concept of gaps since stocks often open at, or very near, the prior session’s close.
Exhibit 5.22 reveals a very unusual and ominous occurrence in that back-to-back evening doji patterns formed. Candlestick lines 1 through 3 formed an evening doji star. The next three sessions, lines 4 through 6, fashioned another evening doji star.