Definition:
Gravestone Doji is a specific Doji with opening and
closing prices equal to the low of the day. The Bullish
Gravestone Doji Pattern is a bottom reversal pattern.
Similar to its cousin the Bullish Inverted Hammer Pattern,
it occurs in a downtrend and represents a possible reversal
of trend.
Recognition Criteria:
1. Market is characterized by downtrend.
2. We see a black body formed at the lower end of the
trading range.
3. We then see a Doji, which does not have a lower shadow
in the second day.
4. No gap down is required.
Explanation:
The market opens below the closing price of the previous
day. Then there is a brief rally but the rally is not
enough to send prices over the closing price of previous
day and prices then reverse direction and fall down
to the day’s lows. This movement however leaves
shorts in a losing position creating the potential for
an upcoming rally. It may not be clear why it signals
a potential reversal. The answer has to do with what
happens over the next session. If the next day opens
above the real body of the Gravestone Doji, it means
those who shorted at the opening (or closing) of the
Gravestone day are losing money. The longer the market
holds above Gravestone Doji’s real body the more
likely these shorts will cover. The short will then
spark a rally by covering their positions, which also
encourage the bottom pickers to go long. The Gravestone
Doji represents the graves of those bears that have
died defending their territory.
Important Factors:
Bullish Gravestone Doji requires further confirmation
on the next day. Confirmation may be in the form of
the next day opening above the Gravestone Doji’s
body. The larger the gap the stronger the confirmation
will be. A white candlestick with higher prices can
also be another form of confirmation.
