Japanese will say the market is trying to hammer out a base. The criteria for the hammer are:
1. The real body is at the upper end of the trading range.
2. The color of the real body can be black or white.
3. A bullish long lower shadow that is at least twice the height of the real body.
4. It should have no, or a very short, upper shadow.
The hammer reflects the visual insights obtained from a candle chart – specifically the hammer's extended lower shadow shows that the market rejected lower price levels to close at, or near, the highs of the session. From my experience, most times when there is a hammer the market may not immediately move up, but may rally slightly, or trade laterally, and then, after expanding on a base, begin to rally. If the market closes under the lows of the hammer, longs should be reconsidered.
In the attached intra-day chart, I show two hammers at the same area (denoted by the arrow). These areas took on extra significance since there were two hammers at the same level and these dual hammers confirmed a support level shown by the dashed line. Once again we see how easy and powerful it is to combine the insights of candle charts (the hammers) with classic western trading signals (the support line) to signal the likelihood of a market turn. As the a famous Japanese Samurai stated, "He whose ranks are united in purpose will be victorious." And this echoes one of my most important concepts- the more signals we have merging at same support or resistance the much higher the likelihood of a turn.
Cumps
Scuba
Fear blind us opportunity, greed blind us the danger
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