14 The Inverted Hammer Signal

14 Key Candlestick Formation

14.The Inverted Hammer Signal

 Description
The Inverted Hammer is comprised of one candle. It is easily identified by the small body with a shadow at least two times greater than the body. Found at the bottom of a downtrend, this shows evidence that the bulls are stepping in, but the selling is still going on. The color of the small body is not important but the white body has more bullish indications than a black body. A positive day is required the following day to confirm this signal.
Criteria

• 1. The upper shadow should be at least two times the length of the body.
• 2. The real body is at the lower end of the trading range. The color of the body is not important, although a white body should have slightly more bullish implications.
• 3. There should be no lower shadow, or a very small lower shadow.

Signal Enhancements

• 1. The longer the upper shadow, the higher the potential of a reversal occurring.
• 2. A gap down from the previous day's close sets up for a stronger reversal move.
• 3. The day after the inverted hammer signal opens higher.
• 4. Large volume on the day of the inverted hammer signal increases the chances that a blow off day has occurred.

Pattern Psychology

After a downtrend has been in effect, the atmosphere is bearish. The price opens and starts to trade higher. The Bulls have stepped in, but they cannot maintain the strength. The existing sellers knock the price back down to the lower end of the trading range. The Bears are still in control. But the next day, the Bulls step in and take the price back up without major resistance from the Bears. If the price maintains strong after the Inverted Hammer day the signal is confirmed.