STOCK GOODIES PLAYS OF THE WEEK

[Black_NITE]

Heikin-Ashi Doji and Spinning Tops

As with normal candlestick, Heikin-Ashi doji and spinning tops can be used to foreshadow reversals. A Heikin-Ashi doji or Heikin-Ashi spinning top looks just the same as a normal doji or spinning top. A doji is a small candlestick with an open and close that are virtually equal. There are small upper and lower shadows to denote little price movement.



Spinning tops have small bodies (open-close range) and long upper/lower shadows (high-low range). Despite a lot of movement from high to low, prices finish near their opening point for little change. This shows indecision that can foreshadow a reversal.

When using Heikin-Ashi Candlesticks, a doji or spinning top in a downtrend is not right away bullish. It just shows indecision within the downtrend. Indecision is the first step to changing direction. Confirmation of a directional change (trend reversal) is required though. Once chartists spot a doji or spinning top in a downtrend, it is time to set a resistance level upon which to base a trend reversal.

The example below shows Caterpillar (CAT) with a spinning top forming in late May (1). The trend is clearly down so a resistance level is set to define a reversal breakout (confirmation). CAT did break this resistance level a few days later, but the breakout failed. Not all signals are perfect. The downtrend extended and CAT then formed two doji in mid June. A resistance level was marked after the doji and CAT broke resistance to confirm a reversal.



Prices extended higher until the stock stalled around 110 in July. Two doji and an indecisive candlestick formed in mid July (3). Also notice that a clear support level was established. CAT broke support in late July to start a strong downtrend and confirm the trend reversal. A spinning top formed during this downtrend (4), but there was no upside follow through or reversal. Confirmation of a trend reversal is important.