> HAMMER AND HANGING-MAN LINES

It is especially important that you wait for bearish confirmation with the hanging man. The logic for this has to do with how the hanging-man line is generated. Usually in this kind of scenario the market is full of bullish energy. Then the hanging man appears. On the hanging-man day, the market opens at or near the highs, then sharply sells off, and then rallies to close at or near the highs. This type of price action now shows once the market starts to sell off, it has become vulnerable to a fast break. However, it might not be the type of price action that would let you think the hanging man could be a top reversal.

Yet, if the market opens lower the next day, those who bought on the open or close of the hanging-man day are now left "hanging" with a losing position. Thus, the general principle for the hanging man; the greater the down gap between the real body of the hanging-man day and the opening the next day, the more likely the hanging man will be a top. Another bearish verification could be a black real body session with a lower close than the hanging-man sessions close.

Exhibit 4.7 is an excellent example of how the same line can be bearish (as in the hanging-man line on July 3) or bullish (the hammer on July 23). Although both the hanging man and hammer in this example have black bodies, the color of the real body is not of major importance.

Exhibit 4.8 shows another case of the dual nature of these lines. There is a bearish hanging man in mid-April that signaled the end of the rally which had started with the bullish hammer on April 2. A variation of a hanging man emerged in mid-March. Its lower shadow was long, but not twice the height of the real body. Yet the other criteria (a real body at the upper end of the daily range and almost no upper shadow) were met. It was also confirmed by a lower close the next day. This line, although not an ideal hanging man, did signal the end of the upturn which started a month earlier. Candlestick charting techniques, like other charting or pattern recognition techniques, have guidelines. But, they are not rigid rules.

As discussed above, there are certain aspects that increase the importance of hanging-man and hammer lines. But, as shown in the hanging man of mid-March, a long lower shadow may not have to be twice the height of the real body in order to give a reversal signal. The longer the lower shadow, the more perfect the pattern.