Hammer

The Hammer candlestick formation is viewed as a bullish reversal candlestick pattern

that mainly occurs at the bottom of downtrends.

The Hammer formation is created when the open, high, and close are roughly the same
price. Also, there is a long lower shadow, twice the length as the real body.
When the high and the close are the same, a bullish Hammer candlestick is formed and
it is considered a stronger formation because the bulls were able to reject the bears
completely plus the bulls were able to push price even more past the opening price.
In contrast, when the open and high are the same, this Hammer formation is considered
less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but
were not able to bring the price back to the price at the open.
The long lower shadow of the Hammer implies that the market tested to find where
support and demand was located. When the market found the area of support, the lows
of the day, bulls began to push prices higher, near the opening price. Thus, the bearish
advance downward was rejected by the bulls.

Hammer Candlestick Chart Example

The chart below of American International Group (AIG) stock illustrates a Hammer
reversal pattern after a downtrend:
In the chart above of AIG, the market began the day testing to find where demand
would enter the market. AIG's stock price eventually found support at the low of the day.
In fact, there was so much support and subsequent buying pressure, that prices were
able to close the day even higher than the open, a very bullish sign.
The Hammer is an extremely helpful candlestick pattern to help traders visually see
where support and demand is located. After a downtrend, the Hammer can signal to
traders that the downtrend could be over and that short positions could potentially be
covered.
However, other indicators should be used in conjunction with the Hammer candlestick
pattern to determine potential buy signals, for example, waiting a day to see if a rally off
of the Hammer formation continues or other chart indications such as a break of a
downward trendline. But other previous day's clues could enter into a traders analysis.
An example of these clues, in the chart above of AIG, shows three prior
day's Doji's (signs of indecision) that suggested that prices could be reversing trend; in
that case and for an aggressive buyer, the Hammer formation could be the trigger to
potentially go long.

The bearish version of the Hammer is the Hanging Man formation (see: Hanging Man).
Another similar candlestick pattern to the Hammer is the Dragonfly Doji.
Hanging Man

The Hanging Man candlestick formation, as one could predict from the name, is viewed
as a bearish sign. This pattern occurs mainly at the top of uptrends and can act as a
warning of a potential reversal downward. It is important to emphasize that the Hanging
Man pattern is a warning of potential price change, not a signal, in and of itself, to go
short.

The Hanging Man formation, just like the Hammer, is created when the open, high, and
close are roughly the same price. Also, there is a long lower shadow, which should be
at least twice the length of the real body.
When the high and the open are the same, a bearish Hanging Man candlestick is
formed and it is considered a stronger bearish sign than when the high and close are
the same, forming a bullish Hanging Man (the bullish Hanging Man is still bearish, just
less so because the day closed with gains).
After a long uptrend, the formation of a Hanging Man is bearish because prices
hesitated by dropping significantly during the day. Granted, buyers came back into the
stock, future, or currency and pushed price back near the open, but the fact that prices
were able to fall significantly shows that bears are testing the resolve of the bulls. What
happens on the next day after the Hanging Man pattern is what gives traders an idea as
to whether or not prices will go higher or lower.

Hanging Man Candlestick Chart Example

The chart below of Alcoa (AA) stock illustrates a Hanging Man, and the large red
bearish candle after the Hanging Man strengthens the bears thinking that a downward
reversal is coming:
In the chart above of Alcoa, the market began the day testing to find where demand
would enter the market. Alcoa's stock price eventually found support at the low of the
day. The bears' excursion downward was halted and prices ended the day slightly
above the close.
Confirmation that the uptrend was in trouble occurred when Alcoa gapped down the
next day and continued downward creating a large bearish red candle. To some traders,
this confirmation candle, plus the fact that the upward trend line support was broken,
gave a potential signal to go short.
It is important to repeat, that the Hanging Man formation is not the sign to potentially go
short; other indicators such as a trend line break or confirmation candle should be used
to determine sell signals.
 Evening Star

The Evening Star Pattern is viewed as a bearish reversal pattern, which usually occurs
at the top of an uptrend. The pattern consists of three candlesticks:

 Large Bullish Candle (Day 1)

 Small Bullish or Bearish Candle (Day 2)
 Large Bearish Candle (Day 3)
The first part of an Evening Star reversal pattern is a large bullish green candle. On the
first day, bulls are definitely in charge, usually new highs were made.
The second day begins with a bullish gap up. It is clear from the opening of Day 2 that
bulls are in control. However, bulls do not push prices much higher. The candlestick on
Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending
reversal. But it is Day 3 that is the most significant candlestick.
Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices
even further downward, often eliminating the gains seen on Day 1.

Evening Star Candlestick Chart Example

The chart below of Exxon-Mobil (XOM) stock shows an example a Evening Star bearish
reversal pattern that occurred at the end of an uptrend:
Day 1 of the Evening Star pattern for Exxon-Mobil (XOM) stock above was a strong
bullish candle, in fact it was so strong that the close was the same as the high (very
bullish sign). Day 2 continued Day 1's bullish sentiment by gapping up. However, Day 2
was a Doji, which is a candlestick signifying indecision. Bulls were unable to continue
the large rally of the previous day; they were only able to close slightly higher than the
open.
Day 3 began with a bearish gap down. In fact, bears took hold of Exxon-Mobil stock the
entire day; the open was the same as the high and the close was the same as the low
(a sign of very bearish sentiment). Also, Day 3 powerfully broke below the upward trend
line that had served as support for XOM for the past week. Both the trend line break and
the classic Evening Star pattern gave traders a potential signal to sell short Exxon-Mobil
stock.

The bullish equivalent of the Evening Star is the Morning Star pattern
(see: Morning Star).
 Morning Star
The Morning Star Pattern is viewed as a bullish reversal pattern, usually occuring at the
bottom of a downtrend. The pattern consists of three candlesticks:

 Large Bearish Candle (Day 1)

 Small Bullish or Bearish Candle (Day 2)
 Large Bullish Candle (Day 3)
The first part of a Morning Star reversal pattern is a large bearish red candle. On the
first day, bears are definitely in charge, usually making new lows.
The second day begins with a bearish gap down. It is clear from the opening of Day 2
that bears are in control. However, bears do not push prices much lower. The
candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bullish candle on Day 2 is viewed as a stronger sign of an
impending reversal. But it is Day 3 that holds the most significance.
Day 3 begins with a bullish gap up, and bulls are able to press prices even further
upward, often eliminating the losses seen on Day 1.

Morning Star Candlestick Chart Example

The chart below of the S&P 400 Midcap exchange traded fund (MDY) shows an
example a Morning Star bullish reversal pattern that occurred at the end of a downtrend:
Day 1 of the Morning Star pattern for the Midcap 400 (MDY) chart above was a strong
bearish red candle. Day 2 continued Day 1's bearish sentiment by gapping down.
However, Day 2 was a Doji, which is a candlestick signifying indecision. Bears were
unable to continue the large decreases of the previous day; they were only able to close
slightly lower than the open.
Day 3 began with a bullish gap up. The bulls then took hold of the Midcap 400
exchange traded fund for the entire day. Also, Day 3 broke above the downward trend
line that had served as resistance for MDY for the past week and a half. Both the trend
line break and the classic Morning Star pattern could have given traders a potential
signal to go long and buy the Midcap 400 exchange traded fund.
Shooting Star

The Shooting Star candlestick formation is viewed as a bearish reversal candlestick

pattern that typically occurs at the top of uptrends.

The Shooting formation is created when the open, low, and close are roughly the same
price. Also, there is a long upper shadow, generally defined as at least twice the length
of the real body.
When the low and the close are the same, a bearish Shooting Star candlestick is
formed and it is considered a stronger formation because the bears were able to reject
the bulls completely plus the bears were able to push prices even more by closing
below the opening price.
The Shooting Star formation is considered less bearish, but nevertheless bearish when
the open and low are roughly the same. The bears were able to counteract the bulls, but
were not able to bring the price back to the price at the open.
The long upper shadow of the Shooting Star implies that the market tested to find where
resistance and supply was located. When the market found the area of resistance, the
highs of the day, bears began to push prices lower, ending the day near the opening
price. Thus, the bullish advance upward was rejected by the bears.

Shooting Star Candlestick Chart Example

The chart below of Cisco Systems (CSCO) illustrates a Shooting Star reversal pattern
after an uptrend:
In the chart above of CSCO, the market began the day testing to find where supply
would enter the market. CSCO's stock price eventually found resistance at the high of
the day. In fact, there was so much resistance and subsequent selling pressure, that
prices were able to close the day significantly lower than the open, a very bearish sign.
The Shooting Star is a candlestick pattern to help traders visually see where resistance
and supply is located. After an uptrend, the Shooting Star pattern can signal to traders
that the uptrend might be over and that long positions could potentially be reduced or
completely exited.
However, other indicators should be used in conjunction with the Shooting Star
candlestick pattern to determine potential sell signals, for example, waiting a day to see
if prices continued falling or other chart indications such as a break of an upward trend
line.
For aggressive traders, the Shooting Star pattern illustrated above could potentially be
used as a sell signal. The red portion of the candle (the difference between the open
and close) was so large with CSCO, that it could be considered the same as a bearish
candle occurring on the next day. However, caution would have to be used because the
close of the Shooting Star rested right at the uptrend support line for Cisco Systems.
Generally speaking though, a trader would wait for a confirmation candle before
entering.
The bullish version of the Shooting Star formation is the Inverted Hammer formation
(see: Inverted Hammer) that occurs at bottoms. Another similar candlestick pattern in
look and interpretation to the Shooting Star pattern is the Gravestone Doji
(see: Gravestone Doji).
Gravestone Doji

The Gravestone Doji is viewed as a bearish reversal candlestick pattern that mainly
occurs at the top of uptrends.

The Gravestone Doji is created when the open, low, and close are the same or about
the same price (Where the open, low, and close are exactly the same price is quite
rare). The most important part of the Graveston Doji is the long upper shadow.
The long upper shadow is generally interpreted by technicians as meaning that the
market is testing to find where supply and potential resistance is located.
The construction of the Gravestone Doji pattern occurs when bulls are able to press
prices upward.
However, an area of resistance is found at the high of the day and selling pressure is
able to push prices back down to the opening price. Therefore, the bullish advance
upward was entirely rejected by the bears.

Gravestone Doji Example

The chart below of Altria (MO) stock illustrates a Gravestone Doji that occurred at the
top of an uptrend:
In the chart above of Altria (MO) stock, the market began the day testing to find where
support would enter the market. Altria eventually found resistance at the high of the day,
and subsequently fell back to the opening's price.
The Gravestone Doji is a helpful Candlestick reversal pattern to help traders visually
see where resistance and supply is likely located. After an uptrend, the Gravestone Doji
can signal to traders that the uptrend could be over and that long positions could
potentially be exited. But other indicators should be used in conjunction with the
Gravestone Doji pattern to determine a potential sell signal. For example, a potential
trigger could be a break of the upward trend line support.
 Tweezer Tops and Bottoms

The Tweezer Top formation is viewed as a bearish reversal pattern seen at the top of
uptrends and the Tweezer Bottom formation is viewed as a bullish reversal pattern seen
at the bottom of downtrends.

Tweezer Top formation consists of two candlesticks:

 Bullish Candle (Day 1)
 Bearish Candle (Day 2)

Tweezer Bottom formation consists of two candlesticks:
 Bearish Candle (Day 1)
 Bullish Candle (Day 2)
Sometimes Tweezer Tops or Bottoms have three candlesticks.
A bearish Tweezer Top occurs during an uptrend when bulls take prices higher, often
closing the day off near the highs (typically a strong bullish sign). However, on the
second day, how traders feel (i.e. their sentiment) reverses completely. The market
opens and goes straight down, often eliminating the entire gains of Day 1.
The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears continue
to take prices lower, usually closing the day near the lows (typically a strong bearish
sign). Nevertheless, Day 2 is completely opposite because prices open and go nowhere
but upwards. This bullish advance on Day 2 sometimes eliminates all losses from the
previous day.
Tweezer Bottom Candlestick Chart Example
A Tweezer Bottom is shown below in the chart of Exxon-Mobil (XOM) stock:

The bears pushed the price of Exxon-Mobil (XOM) downwards on Day 1; however, the
market on Day 2 opened where prices closed on Day 1 and went straight up, reversing
the losses of Day 2. A potential buy signal might be given on the day after the Tweezer
Bottom, if there were other confirming signals.
Windows (Gaps)

Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are
called in the west, are an important concept in technical analysis. Whenever, there is a
gap (current open is not the same as prior closing price), that means that no price and
no volume transacted hands between the gap.

A Gap Up occurs when the open of Day 2 is greater than the close of Day 1.
Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1.
There is much psychology behind gaps. Gaps can act as:
Resistance: Once price gaps downward, the gap can act as resistance.
Support: When prices gap upwards, the gap can act as support to prices in the future.
Windows Example - Gaps as Support and Resistance
The chart below of eBay (EBAY) stock shows the gap up acting as support for prices.

Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite
often. Think of a gap as a hole in the price chart that needs to be filled back in. Another
occurrence with gaps is that once gaps are filled, the gap tends to reverse direction and
continue its way in the direction of the gap (for example, in the chart above of eBay,
back upwards).
The example of eBay (EBAY) above shows the gap acting as support. Traders and
investors see anything below the gap as an area of no return, after all, there was
probably some positive news that sparked the gap up and might still be in play for the
company.
The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps
down. Notice how gaps down can act as areas of resistance and gaps up can act as
areas of support:
Gaps are important areas on a chart that can help a technical analysis trader better find
areas of support or resistance. For more information on how support and resistance
work, (see: Support & Resistance). Also, Gaps are an important part of most
Candlestick Charting patterns;
 Bearish Engulfing Pattern

The Bearish Engulfing Candlestick Pattern is considered to be a bearish reversal

pattern, usually occurring at the top of an uptrend. The pattern consists of two
Candlesticks:

 Smaller Bullish Candle (Day 1)

 Larger Bearish Candle (Day 2)
Generally, the bullish candle real body of Day 1 is contained within the real body of the
bearish candle of Day 2.
The market gaps up (typically interpreted as a bullish sign) on Day 2; however, the bulls
do not push very far higher before bears take over and push prices further down, not
only filling in the gap down from the morning's open but also pushing prices below the
previous day's open (viewed as a bearish sign).
With the Bullish Engulfing Pattern, there is an incredible change of sentiment from the
bullish gap up at the open, to the large bearish real body candle that closed at the lows
of the day. Bears have successfully overtaken bulls for the day and possibly for the next
few periods.
The chart below of Verizon (VZ) stock shows an example two Bearish Engulfing
Patterns occurring at the end of uptrends:
 Bearish Engulfing Potential Sell Signal
Three methodologies for selling using the Bearish Engulfing Pattern are listed below in
order of most aggressive to most conservative:
1. A trader might sell at the close of Day 2. If there is a substantial increase in volume that
accompanies the large move downward in price (see: Volume), a trader might view this as an
even stronger indication to sell.
2. Also, a trader might sell on the day after the Bearish Engulfing Pattern occurs; by waiting until
the next day to sell, a trader is trying to verify that the bearish reversal pattern is for real and
was not just a one day occurrence. In the chart above of Verizon, a trader would probably enter
on the day after the Bearish Engulfing Pattern because the selling continued.
3. Usually trader's wait for other signals, such as a price break below the upward support line
(see: Support & Resistance), before entering a sell order. However, in the case of Verizon
above, the Bearish Engulfing Pattern occurred at the same time as the trend line break below
support.

The following 15-minute chart of Verizon (VZ) is of the 2-day period comprising the
Bearish Engulfing Pattern example on the prior page:
 Day 1: As is seen in the chart above, Day 1 was an up day, closing near the day's high
(bullish sentiment).
 Day 2: The open was a gap up, a very bullish sign; nevertheless, the bulls ran out of
buying pressure and prices fell the rest of the day, closing near the day's lows (bearish
sentiment) and lower than Day 1's lows.
 Bullish Engulfing Pattern

The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occuring
at the bottom of a downtrend. The pattern consists of two Candlesticks:

 Smaller Bearish Candle (Day 1)

 Larger Bullish Candle (Day 2)
The bearish candle real body of Day 1 is usually contained within the real body of the
bullish candle of Day 2.
On Day 2, the market gaps down; however, the bears do not get very far before bulls
take over and push prices higher, filling in the gap down from the morning's open and
pushing prices past the previous day's open.
The interpretive power of the Bullish Engulfing Pattern comes from the
incredible change of sentiment from a bearish gap down in the morning, to a large
bullish real body candle that closes at the highs of the day. Bears have overstayed their
welcome and bulls have taken control of the market.
The chart below of the S&P 500 Depository Receipts Exchange Traded Fund (SPY)
shows an example of a Bullish Engulfing Pattern occurring at the end of a downtrend:
 Bullish Engulfing Potential Buy Signal
There are three main times when a trader might buy using the Bullish Engulfing Pattern;
the buy signals that are presented below are ordered from the most aggressive to most
conservative:
1. A trader might buy at the close of Day 2 when prices rallied upwards from the gap down in the
morning. Traders could interpret that the rally on Day 2 was significant and truly a reversal of
market sentiment, if there was a substantial increase in volume that accompanied the large
move upward in price (see: Volume).
2. Secondly a trader might buy on the day after the Bullish Engulfing Pattern occurs; by waiting
until the next day to buy, a trader is attempting to confirm that the bullish reversal and
enthusiasm of the prior day is continuing and was not just a one day occurrence like a short
covering rally. In the chart above of the SPY's, a trader might not enter the market long on the
day after the Bullish Engulfing Pattern because the market gapped down significantly and even
made new lows. A trader using methodology #2, would likely wait for a different potential buy
signal such as the one presented in method #3 next.
3. Thirdly, a trader might wait after the bullish engulfing pattern for another signal, mainly a price
break above the downward resistance line (see: Support & Resistance), before entering a buy
order.

The following 15-minute chart of the S&P 500 exchange traded fund (SPY) is of the 2-
day period comprising the Bullish Engulfing Pattern example on the prior page:
 Day 1: As is seen in the chart above, Day 1 was a down day, even closing the day at
the low (bearish sentiment).
 Day 2: The open was a gap down, very bearish sign; but the bulls appeared to have
had enough because the price of the SPY's went up the rest of the day, closing near the
day's highs (bullish sentiment) and higher than Day 1's high.
Inverted Hammer

The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends
and can act as a warning of a potential reversal upward. It is important to note that the
Inverted pattern is a warning of potential price change, not a signal, in and of itself, to
buy.

The Inverted Hammer formation, just like the Shooting Star formation, is created when
the open, low, and close are roughly the same price. Also, there is a long upper
shadow, which should be at least twice the length of the real body.
When the low and the open are the same, a bullish Inverted Hammer candlestick is
formed and it is considered a stronger bullish sign than when the low and close are the
same, forming a bearish Hanging Man (the bearish Hanging Man is still considered
bullish, just not as much because the day ended by closing with losses).
After a long downtrend, the formation of an Inverted Hammer is bullish because prices
hesitated their move downward by increasing significantly during the day. Nevertheless,
sellers came back into the stock, future, or currency and pushed prices back near the
open, but the fact that prices were able to increase significantly shows that bulls are
testing the power of the bears. What happens on the next day after the Inverted
Hammer pattern is what gives traders an idea as to whether or not prices will go higher
or lower.
Inverted Hammer Candlestick Chart Example
The chart below of the S&P 500 Futures contract shows the Inverted Hammer
foreshadowing future price increases:

In the chart above of e-mini future, the market began the day by gapping down. Prices
moved higher, until resistance and supply was found at the high of the day. The bulls'
excursion upward was halted and prices ended the day below the open.
Confirmation that the downtrend was in trouble occurred the next day when the E-mini
S&P 500 Futures contract gapped up the next day and continued to move upward,
creating a bullish green candle. To some traders, this confirmation candle, plus the fact
that the downward trend line resistance was broken, gave them a potential signal to go
long.
It is important to repeat, that the Inverted Hammer formation is not the signal to go long;
other indicators such as a trend line break or confirmation candle should be used to
generate potential buy signal.
 Harami

The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is considered a

reversal pattern. The pattern consists of two Candlesticks:

 Larger Bullish or Bearish Candle (Day 1)

 Smaller Bullish or Bearish Candle (Day 2)

The Harami Pattern is considered either bullish or bearish based on the criteria below:
Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on
Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important
aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to
move higher back to the close of Day 1. This is a sign that uncertainty could be entering
the market.

Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on
Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most
important aspect of the bullish Harami is that prices gapped upon Day 2 and price was
held up and unable to move lower back to the bearish close of Day 1.
Harami Candlestick Chart Example
The chart below of the Nasdaq 100 E-mini Futures contract shows an example of both a
bullish and bearish Harami candlestick pattern:

The first Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a
bullish reversal Harami. First there was a long bearish red candle. Second, the market
gapped up at the open. In the case above, Day 2 was a bullish candlestick, which made
the bullish Harami look even more bullish.

Harami Candlestick Potential Buy Signal

A buy signal could be triggered when the day after the bullish Harami occurred, price
rose higher, closing above the downward resistance trendline. A bullish Harami pattern
and a trend line break is a combination that potentially could results in a buy signal.
The second Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future
is a bearish reversal Harami. The first candle was a long bullish green candle. On the
second candle, the market gapped down at the open. The chart above of the e-mini
shows that Day 2 was a bearish candlestick; this made the bearish Harami look even
more bearish.

Harami Candlestick Potential Sell Signal

A sell signal could be triggered when the day after the bearish Harami occured, price fell
even further down, closing below the upward support trendline. When combined, a
bearish Harami pattern and a trend line break might be interpreted as a potential sell
signal.
 Piercing Line Pattern

The Piercing Pattern is viewed as a bullish candlestick reversal pattern, similar to the
Bullish Engulfing Pattern (see: Bullish Engulfing Pattern). There are two components of
a Piercing Pattern formation:

 Bearish Candle (Day 1)

 Bullish Candle (Day 2)

A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of
Day 1's bearish candle.
Moreover, price gaps down on Day 2 only for the gap to be filled (see: Gaps) and closes
significantly into the losses made previously in Day 1's bearish candlestick.
The rejection of the gap down by the bulls typically can be viewed as a bullish sign, and
the fact that bulls were able to press further up into the losses of the previous day adds
even more bullish sentiment. Bulls were successful in holding prices higher, absorbing
excess supply and increasing the level of demand.
Piercing Pattern Candlestick Chart Example
The chart below of Intel (INTC) stock illustrates an example of the Piercing Pattern:

Piercing Pattern Candlestick Potential Buy Signal

Generally other technical indicators are used to confirm a buy signal given by the
Piercing Pattern (i.e. downward trend line break). Since the Piercing Pattern means that
bulls were unable to completely reverse the losses of Day 1, more bullish movement
might be expected before an outright potential buy signal is given. Also, more volume
than usual on the bullish advance on Day 2 might be a stronger indicator that bulls have
taken charge and that the prior downtrend is likely ending.
Bullish Engulfing Pattern is typically viewed as being more bullish than the Piercing
Pattern because it completely reverses the losses of Day 1 and adds new gains.