The gravestone doji is a bearish reversal candlestick which is very rare. It signals a possible bearish reversal and works like a topping tail. While it does not work 100% of the time, the presence of a gravestone doji can be very intimidating and therefore traders should take note when they see this pattern appear in their stocks.
The above is how a gravestone doji looks like. The open and the close is the same and there is a tail at the top. Because the gravestone doji is so rare, sometimes I do not require the body (open and close) to be the same price. A little variation is alright. And as I said, the gravestone doji works just like the topping tail. They both point to a possible reversal in the stock.
The chart above of JWN shows how powerful the gravestone doji can be. Although the stock did not drop immediately after the appearance of the doji, nevertheless, the stock was not able to go above the highs of that pattern. It eventually formed a double top and the stock declined from there.
That is why it is most important to pay attention when your stock forms a gravestone doji. Just because it does not drop tomorrow or next week, the doji may be warning us of a weakness in the stock.
KSS above is another great example of how a gravestone doji can warn of a potential fall in your stock. A gravestone doji formed but there was no reversal! The stock climbed higher in the next few weeks. But after that, the stock went below the 20 MA, then it cross below the 50 MA and finally drop below the 200 MA and ended much lower from where we first saw the gravestone doji. When you see a doji like this, always beware!
A gravestone doji that appears at important areas such as the 50 MA resistance and the trendline packs a powerful punch to a stock. In the chart above, notice how KR tried to rally only to form a gravestone doji at such powerful resistance areas. This confirmed the viability of the resistance and the stock quickly dropped lower.
Just because the gravestone doji is a powerful reversal pattern, it does not mean it will work all the time. No indicator or even support or resistance work 100% of the time. In this case, the stock exhibited a gravestone doji but the market quickly ignored this pattern. Well, the pattern appear because of the resistance area on the left but since this stock was in an uptrend, the momentum was to the upside.
A continuation on the upward direction beat the patterns signal ability. So, not everything works all the time. I just showed it to you here to let you know that not everything works 100% of the time.
MMM is a perfect example of what resistance and a gravestone doji can do to your favorite stock. The stock had a bearish 20 cross 50 MA and it made a new low. It tried to rally after the new low but immediately met resistance and formed a gravestone doji. Traders who saw this pattern could have shorted this stock and made some handsome profits.
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