In Japanese candlestick terminology, a bullish “hammer” candle often signals a trend reversal. Above all else, the hammer (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level.
Just as in real estate, it is all about location, location, location, since the same hammer candle after an uptrend can signal a potential bearish reversal and is instead called a “hanging man.” In other words, the hammer is most valid and carries the most clout within the context of a downtrend–Otherwise, there would not be much of a trend to reverse in the first place.
Some key elements of the “hammer” are:
1. A prior, established downtrend trend.
2. Little or no upper wick to the candle, and a small body at the top end of the hammer.
3. A long shadow below the relatively small body at the top of the candle, giving the look of an actual hammer.
There are two other critical points here:
- Confirmation in the form of some imminent upside follow-through is essential, as any individual candlestick, by itself, is insufficient evidence to glean an edge for a trade.
- You must know your timeframe, as a hammer in a steep downtrend may signal a bottom, but certainly not the bottom.
That said, you have an easily-defined stop-loss for a trade, below the lows of the hammer.
As an actionable, real-time example, let us use the natural gas ETF, UNG. 12631 member “belzile” called out the hammer candle forming today in our chat room earlier. Now, we still have much trading to do before the closing bell today and I write this the ETF is fading a bit. However, if natty goes out near the highs of the session (above $17.15 most likely) we will have seen the textbook hammer after a steep downtrend. It does not matter whether the hammer closes green or slightly red.
With some confirmation of that hammer, natty is setting up for at least a tradable bounce.
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Thanks Chess. My old man stock MSFT seems awake today. Ready to go up again? Thanks for your insight after earning shock, so I still hold.
Still consolidating. Don’t see a play there yet.
Potential hammer in NIHD?
Location not ideal–within consolidation – not quite the look of a hammer either. But green nonetheless and can move above $6.75.
Dang, was hoping NIHD was exhibiting a hammer powerful to be Thor’s hammer, Mjölnir. Still, as you said, perhaps good for Burger King money.
Thanks for the rapid feedback. You guys hereabouts are great.
You bet
it want to get litt uppp