On many occasions, you include the comments “Doji may indicate a change in the pattern.” Many times I have a hard time understanding whether you mean that the new direction will be up or down. The reason I am confused is that for example we are in a LONG play and the stock has come back (say 4%) to test the breakout and now a DOJI occurs on high volume. Now does that mean that the change in direction will be up or down?

You ask a good question. In our technical analysis, we use candlestick charting, a Japanese method for plotting stock movements, as part of our analysis. One of the symbols in this kind of charting is a doji, where the open and closing price are in close proximity. It can occur at any time, but after a run higher or lower it takes on more significance. it is an indicator of momentum, and after a run up or down it puts us on alert that the run could be coming to an end. Dojis are not certainties that a change is coming, but they are a strong indication, particularly after a strong move, and we should be on alert for it. When a doji occurs at a resistance point after a run or a support point after a pullback that is even stronger indication of a change in momentum. If you add a volume spike to the mix the signal is even stronger. You ask in particular about a high-volume doji that has occurred on a test of a breakout. Look to see if it is testing near support such as the 10 or 18 day MVA or the acutal breakout point. After volume has dropped on the pullback, did it spike higher as the doji turns up at support? Did the stock reach down below the support intraday and then rally back up to close with the doji? That is called a doji with a tail and shows that the sellers were ahead but lost control to the buyers and they ran it back up. That indicates the buyers have caught up to the sellers and acutally overran them as the stock shot back up. that is a very good signal indeed.

If this kind of doji (long tail) occurs on low volume it is not as strong a signal as that of the high volume doji, but if the sell off down to the support or the doji has been on low volume, then the low volume doji is just fine. It can indicate that the move to the upside is imminent (next day or two). Again, the pattern is just a flag and not a ‘buy’ signal. Let there be confirmation of the move the next day (it actually starts up), and then the move.

There will be finer interpretations of high and low-volume dojis, but the general rule is that if either occur after a good run upside they can mean the stock is ready to pull back. If they form after a decline, look for a possible move back up again. Of course, support and resistance and volume will factor into any situation, so while the doji gives the first indication of a change in direction, these other elements have to be analyzed in order to predict the force and duration of the move.