Hammer

Implication

The Hammer indicates that the prior downtrend is about to end and may reverse to an uptrend or move sideways. This pattern is an indication of a financial instrument's SHORT-TERM outlook.

Description

The Hammer is characterized by a small Real Body near the top of the price range. The Real Body can be black or white, although a white candlestick is preferable. A white candlestick is slightly more bullish since it shows that the market sold off sharply during the session and then rebounded to close slightly above the opening price level. The Hammer has a long Lower Shadow and an Upper Shadow that is very small or non-existent.

Trading Considerations

In cases where a major downtrend followed by a Hammer exists, the investor should consider vacating short positions.

Criteria that Support

A Hammer can be confirmed by a bullish gap between the Real Body of the Hammer and the open on the next session. In other words, the investor should look for the next session opening higher than the Real Body of the Hammer. The greater the gap, the stronger the signal.

The Hammer may be stronger if the subsequent session shows a white Real Body with a close higher than the close of the Hammer.

A Hammer is more significant if it is followed in the next session by another Hammer with superior characteristics.

Patterns with longer Lower Shadows have greater significance.

The smaller the Real Body and the Upper Shadow the greater the significance of the pattern.

Criteria that Refute

It is important to view signals in the context of prior price action. If the downtrend is strong and there are major bearish indicators before the Hammer, then the Hammer may not work. In this instance, it may be better to wait for bullish confirmation before acting.

The downtrend may still be in force if the next session opens lower than the Real Body of the Hammer.

A Hammer with a black Real Body (where the open is higher than the close) may indicate weakness in the pattern.

Underlying Behavior

A long Lower Shadow and the positioning of the Real Body near the top of the range are both indications that the bears could not maintain new lows. This creates the bullish situation.