Exhibit 4.9 shows a series of bullish hammers numbered 1 to 4 (hammer 2 is considered a hammer in spite of its minute upper shadow). The interesting feature of this chart is the buy signal given early in 1990. New lows appeared at hammers 3 and 4 as prices moved under the July lows at hammer 2. Yet, there was no continuation to the downside. The bears had their chance to run with the ball. They fumbled. The two bullish hammers (3 and 4) show the bulls regained control. Hammer 3 was not an ideal hammer since the lower shadow was not twice the height of the real body. This line did reflect, however, the failure of the bears to maintain new lows. The following week's hammer reinforced the conclusion that a bottom reversal was likely to occur.
In Exhibit 4.10
hammers 1 and 3 are bottoms. Hammer 2 signaled the end of the prior downtrend
as the trend shifted from down to neutral. Hammer 4 did not work. This hammer
line brings out an important point about hammers (or any of the other patterns
I discuss). They should be viewed in the context of the prior price action. In
this context, look at hammer 4. The day before this hammer, the market formed
an extremely bearish candlestick line. It was a long, black day with a shaven head
and a shaven bottom (that is, it opened on its high and closed on its low). This
manifested strong downside momentum. Hammer 4 also punctured the old support
level of January 24. Considering the aforementioned bearish factors, it would
be prudent to wait for confirmation that the bulls were in charge again before
acting on hammer 4. For example, a white candlestick which closed higher than
the close of hammer 4 might have been viewed as a confirmation. (contd.)
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