HAMMER AND HANGING-MAN LINES

HAMMER AND HANGING-MAN LINES

Exhibit 4.4 shows candlesticks with long lower shadows and small real bodies. The real bodies are near the top of the daily range. The variety of candlestick lines shown in the exhibit are fascinating in that either line can be bullish or bearish depending on where they appear in a trend. If either of these lines emerges during a downtrend it is a signal that the downtrend should end. In such a scenario, this line is labeled a hammer, as in "the market is hammering out" a base. See Exhibit 4.5. Interestingly, the actual Japanese word for this line is takuri. This word means something to the affect of "trying to gauge the depth of the water by feeling for its bottom."

If either of the lines in Exhibit 4.4 emerge after a rally it tells you that the prior move may be ending. Such a line is ominously called a hanging man (see Exhibit 4.6). The name hanging man is derived from the fact that it looks like a hanging man with dangling legs.

It may seem unusual that the same candlestick line can be both bullish and bearish. Yet, for those familiar with Western island tops and island bottoms you will recognize that the identical idea applies here. The island formation is either bullish or bearish depending on where it is in a trend. An island after a prolonged uptrend is bearish, while the same island pattern after a downtrend is bullish.

The hammer and hanging man can be recognized by three criteria:

1. The real body is at the upper end of the trading range. The color of the real body is not important.

2. A long lower shadow should be twice the height of the real body.

3. It should have no, or a very short, upper shadow.

The longer the lower shadow, the shorter the upper shadow and the' smaller the real body the more meaningful the bullish hammer or bearish hanging man. Although the real body of the hammer or hanging man can be white or black, it is slightly more bullish if the real body of the hammer is white, and slightly more bearish if the real body of the hanging man is black. If a hammer has a white real body it means the market sold off sharply during the session and then bounced back to close at, or near, the session's high. This could have bullish ramifications. If a hanging man has a black real body, it shows that the close could not get back to the opening price level. This could have potentially bearish implications. (contd.)