Last week, First Solar (FSLR) ran up significantly on news of a large deal for a solar power plant in China. The second day of the run was highlighted in my post about Opening Gap Reversals. That day saw a huge run up early in the morning and a slow burn back down to its opening price which formed the Long-Legged Doji in the stock chart above.
Long-Legged Doji
The long-legged doji is a specific form of the standard doji. While the doji signifies indecision, the long-legged doji shows that a deeper and more extended battle occurred between the bears and the bulls that ended in exhaustion as well as indecision. Due to the exhaustion, the long-legged doji is a stronger reversal signal than a standard doji. This long-legged doji is even more predictive of a pull-back due to its long upper wick compared to a small lower wick. This gives it a similar appearance to a shooting star.
For candlestick patterns, confirmation is required for entry. While we did not get a confirmation the following day, the long-legged doji was followed by another bearish reversal pattern.
Bearish Engulfing Pattern
The bearish engulfing pattern is a two-candle pattern that signals a reversal. The formation starts with a small bull candle. This candle is followed by a bearish candle that has gapped up but has closed below the bottom of the body of the previous candle.
The idea is that the second morning started out with a lot of buyer exuberance, but exhaustion set in. This time the bears have really taken control and have pushed the price below the previous days close.
Candlestick Pattern Combo
While the doji as a reversal signal is considered weak, and the bearish engulfing pattern moderate at best, the combination of the two makes a strong case for a temporary pull-back. Another telling reversal signal is the fact that the tall bearish candle in the bearish engulfing didn’t quite reach the highs of the doji before the bears shoved the price back down. We’re going to want to see weakness next week to confirm the reversal.
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