Identifying a bullish doji star

A bullish doji star is a two-day pattern with a doji appearing on the signal day, and it must appear during a downtrend. A genuine bullish doji star must also include the following features:

1 A down setup day, preferably with a long black candle.

1 A signal day that includes an open and close that are equal or very nearly equal, preferably in the middle of a relatively short trading day. (This indicates an almost equal battle between the bulls and bears, where neither faction can claim victory.)

1 A gap down opening between the long black candle of the setup day and the doji of the signal day.

This last feature shows that a gap down is met with buying but only enough buying to keep the price stable.

Figure 7-13 shows two days of trading activity that creates the bullish doji star.

Figure 7-13:

The bullish doji star.

Wishing (and trading) on a bullish doji star

Figure 7-14 shows a bullish doji star working out in a downtrend reversal for the stock Hewlett Packard Co., symbol HPQ. Notice the doji that appears after the gap down from the previous day, which was a down day. The low of the doji is never violated, and a buyer is handsomely rewarded with a huge day for the bulls three days after the pattern appears. If only all buy signals resulted in a 10 percent up day!

Failing on a long signal

Unfortunately, some bullish doji stars are more like falling stars than shooting stars. Check out Figure 7-15 for an example. It's a chart of the futures contract that trades on U.S. Treasury bonds. A doji star appears after a down day and in the midst of a downtrend. Very encouraging! For the next couple of days, the downtrend looks like it has come to an end. But just when the bulls think they are going to make a move, the bears come in with a vengeance and push prices lower than the low of the doji signal day. The downtrend kicks right back into gear.

Figure 7-14:

The bullish doji star working well as a buy signal on a chart of HPQ.

Figure 7-14:

The bullish doji star working well as a buy signal on a chart of HPQ.

Figure 7-15:

The bullish doji star failing on a chart of the U.S. Treasury bond futures.

Figure 7-15:

The bullish doji star failing on a chart of the U.S. Treasury bond futures.

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