Recognizing a dragonfly doji

The dragonfly doji is unique in that three of the four candlestick components — the open, high, and close — are equal. A dragonfly doji comes from a day when a stock opens, trades down during the first part the day, and then at some point starts to trade back up, eventually closing on the high (which is also the open). In terms of bears and bulls, on a dragonfly doji day, the bears initially decide they're going to rule the day, and the resulting lower prices lead the bulls to decide it's time to buy. The bulls then take over and push the price up as they dominate the rest of the day, until the price is right back where it started. Refer to Figure 5-9 for a classic example of a dragonfly doji.

For an illustration of the inner workings of a day that results in a dragonfly doji, check out Figure 5-10. This figure features a 30-minute chart of the price action that occurs over the course of a day to cause a dragonfly doji. The bears dominate the first half of the day, but the bulls take over in the afternoon, and the result is a close equal to the open — all that struggling during the day for nothing.

Figure 5-9:

The dragonfly doji.

Figure 5-10:

The bullish significance of the dragonfly doji.

Bullishness

The price action behind a dragonfly doji bodes very well for those hoping that prices go higher, because a price at which people buy aggressively has been set at the low end of the wick. The low of a dragonfly doji day is considered a near-term support level, because it's clear that buyers came in at that level and turned the trend from down to up.

The length of a wick from the high to low doesn't have to be any specific distance to qualify as a dragonfly. However, the wick length can signify the amount of bullish significance a dragonfly doji has for future price action. Put simply, the longer the wick, the more bullish the pattern. Figure 5-11 illustrates this point.

Figure 5-11 displays price action that creates a dragonfly doji on a daily chart. Dragonfly dojis appear when the open and close are very near or equal to the high, so the beginning and ending of this chart are equal. The price action during this day is very interesting. The bears take over from the open and push the price down. Eventually, though, lower prices entice buyers and they get aggressive, pushing the price back up to the open and settling on the high of the day.

Figure 5-11:

Intraday action that results in a dragonfly doji on a daily chart.

Figure 5-11 displays price action that creates a dragonfly doji on a daily chart. Dragonfly dojis appear when the open and close are very near or equal to the high, so the beginning and ending of this chart are equal. The price action during this day is very interesting. The bears take over from the open and push the price down. Eventually, though, lower prices entice buyers and they get aggressive, pushing the price back up to the open and settling on the high of the day.

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