1. Market is characterized by downtrend.
2. We see a black body formed at the lower end of the trading range.
3. We then see a , which does not have a lower shadow in the second day.
4. No gap down is required.
The market opens below the closing price of the previous day. Then there is a brief rally but the rally is not enough to send prices over the closing price of previous day and prices then reverse direction and fall down to the day’s lows. This movement however leaves shorts in a losing position creating the potential for an upcoming rally. It may not be clear why it signals a potential reversal. The answer has to do with what happens over the next session. If the next day opens above the real body of the Gravestone , it means those who shorted at the opening (or closing) of the Gravestone day are losing money. The longer the market holds above Gravestone Doji’s real body the more likely these shorts will cover. The short will then spark a rally by covering their positions, which also encourage the bottom pickers to go long. The Gravestone represents the graves of those bears that have died defending their territory.
Gravestone requires further confirmation on the next day. Confirmation may be in the form of the next day opening above the Gravestone Doji’s body. The larger the gap the stronger the confirmation will be. A white with higher prices can also be another form of confirmation.