S&P 500’s Last Stand in 2023: Bearish ‘Doji’ Sparks Battle Between Bulls and Bears

A pair of ‘doji’ formations has surfaced on the S&P 500’s candlestick charts, indicating the potential for a significant market move, although the direction remains uncertain.

Despite a notable surge, signs of bearish sentiment are emerging in a key U.S. index. The S&P 500 is poised within 2% of its previous record high from January 3, 2022, while the Dow Jones Industrial Average has secured three consecutive all-time highs and is eyeing a fourth on Monday.

Nevertheless, a time-honored charting technique has unveiled a cautionary signal, hinting at a possible reversal in the prevailing bullish trend in the widely monitored stock-market index. Following a robust post-Federal Reserve meeting rally, the S&P 500 displayed a classic doji chart on Thursday, followed by a less conventional doji formation on Friday.

In the realm of candlestick charts, the “doji” pattern, originating from Japan over 200 years ago, is interpreted by market analysts as a potential harbinger of future market movements based on investor psychology. Dojis, characterized by their thin bodies reflecting closely aligned opening and closing prices, along with equal-length vertical lines or “wicks,” denote the day’s trading range.

Drawing parallels to a frozen ball midair before descending after being thrown upward, MarketWatch‘s Tomi Kilgore underscores the significance of doji patterns, particularly after substantial gains like the S&P 500’s 1.4% rise on Wednesday and the Dow Jones breaching 37,000 for the first time.

The importance of the doji lies in its capacity to assist in gauging whether an asset has reached its peak, signaling a potential reversal of gains, or if there is still room for growth. Steve Nison, credited with introducing candlestick charts to the West, emphasizes that a doji in an extended rally indicates buyer indecision and potential for a reversal.

However, it is essential to underscore that a doji does not guarantee a reversal in momentum but rather provides insights into market psychology. In the view of Vladimir Ribakov, writing for TradingBud, the doji pattern signifies a temporary equilibrium of power between buyers and sellers before an impending significant move.

The occurrence of two consecutive dojis, observed in the S&P 500 on Thursday and Friday, heightens the probability of a substantial move in either direction. Ribakov suggests a powerful move may follow, leaving the outcome uncertain between bullish and bearish forces.

Market optimism stems from investor expectations that the Federal Reserve will not only cease interest rate hikes but also implement significant rate cuts, potentially lowering benchmark rates from the current 5.25%-5.5%. The Fed’s dot plot anticipates approximately three rate reductions, implying at least a 0.75% cut.

While the Fed’s shift from rate hikes has led to decreased yields for benchmark bonds, reducing overall borrowing costs, the battle between stock bulls and bears hinges on the success of the Fed’s soft landing attempt in 2024. Although the odds seem favorable, the prospect of multiple rate cuts raises concerns about the economy’s stability in the coming year.