Could you please explain the significance of a pattern showing a doji on very high volume as opposed to the same doji pattern, but with light volume? How should the two differences in volume be interpreted on the same doji pattern? (July 14, 2001)
A doji is a one-day pattern on a candlestick chart. It occurs when the open and closing price are the same or very close to one another. What it signifies is that the buyers and sellers were evenly matched: the stock ended where it started, so no one won the day. These symbols are the most important after a run either to the upside or to the downside has occurred. What we typically see in a stock that is moving higher is the open at a lower price and a close at a higher price. As the run continues, the gains become less and less; there are fewer and fewer new buyers on that run. Eventually there are equal numbers of buyers and sellers and you get the doji pattern. The same in reverse happens on selling bouts. When you get the doji, that means the side that was in control, either buyers or sellers, is now evenly matched with the other side. In other words, on a rally, the sellers have caught up with the buyers, and usually the doji signals some near term selling as the sellers then move into the majority.
What does high or low volume accompanying a doji mean? Well, lets look at some scenarios. If a stock is running higher and shows a pattern of slowing down on the move and then shows us a doji on very high volume and where the stock closes the session well off of its high, that is a sign of reversal. The stock tried to continue its run, but sellers jumped in big time and drove it back to where it started the day on high volume. That is usually a sign that some stronger selling is coming the next few sessions. If the same occurs but the doji is on light volume, it still means that move may be over. If a stock hits a high on low volume, that means not many buyers are supporting the move to the high; selling is most likely. However, it may not be as severe as if there is that high volume reversal where the sellers just jump onto the stock. You have to be careful, and doji's are not automatic signals; they are flags saying 'take note of me.' Wait for confirmation, but be ready; the doji was your warning flare. Low volume doji's may mean less virulent selling. Indeed, we like to see those low volume pullbacks to near term support as that means no share dumping and most likely a good buy point or 'add to' point is coming at near term support.
On the downside the results are similar. A high-volume doji that occurs after a stock sells way down and then recovers is good. We call that a doji with a long tail; how poetic. Anyway, what that means is that the stock sold way down, but then buyers jumped in to push it back up to where it opened. Perhaps we are being told a reversal just occurred and buyers now outnumber sellers. If this occurs at support, we get really excited. As for the low volume variety, it is not as strong a signal as that doji with a long tail on high volume, but if the sell off down to the support or the doji has been on low volume, the low volume doji is just fine; it can indicate that the move to the upside is just around the corner (the next day or two). Again, the pattern is just a signal and not a 'buy' signal. Let there be confirmation of the move the next day (it actually starts up), and then make the move.
We cover doji's, candlesticks, and all of the technical analysis methods and techniques we use in the online seminars. Do your self a favor and take these courses to be ready for this next move up that will inevitably come.
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