Drawing the
intra-day chart using candlesticks shows the high, low, open, and close of the
session (see Exhibit 4.11). For example, an hourly session would have a
candlestick line that uses the opening and close for that hour in order to
determine the real body. The high and low for that hour would be used for the
upper and lower shadows. By looking closely at this chart, one can see that a
hammer formed during the first hour on April 11. Like hammer 4 in Exhibit 4.10,
prices gapped lower but the white candlestick which followed closed higher. This
helped to confirm a bottom.
The second
hourly line on April 12, although in the shape of a hammer, was not a true
hammer. A hammer is a bottom reversal pattern. One of the criterion for a
hammer is that there should be a downtrend (even a minor one) in order for the
hammer to reverse that trend. This line is not a hanging man either since a
hanging man should appear after an uptrend. In this case, if this line arose
near the highs of the prior black candlestick session, it would have been
considered a hanging man.
Exhibit 4.12
shows a hammer in early April that successfully called the end of the major
decline which had began months earlier. The long lower shadow, (many times the
height of the real body) a small real body, and no upper shadow made this a
classic hammer.
Exhibit 4.13
shows a classic hanging-man pattern. New highs were made for the move via an
opening gap on the hanging-man day. The market then gaps lower leaving all
those new longs, who bought on the hanging man's open or close, left "hanging"
with a losing position.
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