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Beware the Gravestone Doji

Posted December 7, 2021

This is the most ominous chart I’ve seen in years:

Gravestone Doji Chart
This is a five-year, monthly candlestick chart of the SPX. The SPX is based on the 500 top companies in the United States.

Each candlestick represents a month. The chart goes back to 2017.

That red candlestick from two months ago (October) that looks like an upside down hammer is called a “gravestone doji.”

Japanese Rice Traders

Candlestick charts go back 1,000 years to rice traders in Japan. A green candlestick means the asset price closed higher than it opened. Red means the market closed lower than it opened.

The thin line or tail represents the highs and lows during the session.

Here is the gravestone doji diagram:

Gravestone Doji Chart2
What this means is that the buyers took the market up at the start of the month but then the sellers overwhelmed them. It closed where it opened.

It means that the buyers are done. There are no more buyers. This is also called a blowoff top.

When this comes after a long bullish market where everything is overvalued, it is bad news. You’ll notice the last one in the first chart came in January of 2020 when COVID hit and the SPX sold off about 1,000 points.

When I first started trading, a salty veteran referred to this as “flags planted on the top of a mountain,” like Hillary and Norgay on the peak of Everest.

Sometimes a gravestone doji doesn't mean very much. The market consolidates and goes on. But there is a lot of air under this market. The market cap to GDP is the highest it has ever been. Inflation is running well above the Fed’s target rate of 2% and rate hikes are back on the menu.

We are 12 years into this heated bull market. A 700 to 1,000 point drop on the S&P 500 could happen over the next few months. I’ve been telling my Launchpad Trader readers to take profits, banking short-term gains like 93% in Encore Wire Corp (NASDAQ: WIRE) and 90% in Asana Inc. (NYSE: ASAN).

I’m making the call. It's time to change your mindset from “buy the dips” to “sell the rips.” No one ever went broke taking a profit.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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