Definition:
Bullish Inverted Hammer Pattern is a candlestick characterized
by a long upper shadow and a small real body preceded
by a long black real body. It is similar in shape to
the Bearish Shooting Star. The shooting star appears
in a downtrend and thus it becomes a potentially bullish
inverted hammer.
Recognition Criteria:
1. Market is currently characterized by downtrend.
2. The first day of the pattern is a black candlestick
formed at the lower end of the trading range.
3. The second day of the pattern is a small real body
and is formed at the lower end of the trading range.
4. The color of the second real body is not important,
however the color of the body is black in the first
day.
5. No gap down is required, as long as the pattern is
seen after a downtrend.
6. Upper shadow of the second small body should be at
least twice as long as the real body.
7. The second body does not have lower shadow or it
has only a very little lower shadow.
Explanation:
Bullish Inverted Hammer Pattern occurs in a bearish
background. In a day of inverted hammer, market opens
at or near its low. Then prices change direction and
we see a rally. However the bulls cannot succeed to
sustain the rally during the rest of the day and prices
finally close either at or near the low of the day.
It may not be clear why this type of price action is
interpreted as a potential reversal signal. The answer
has to do with what happens over the next day. If the
next day opens above the real body of the inverted hammer,
it means that those who shorted at the opening or closing
of the inverted hammer day are losing money. The longer
the market holds above the inverted hammer’s real
body, the more likely these shorts will attempt to cover
their positions. This may ignite a rally as a result
of covered short positions, which may then inspire the
bottom pickers to take long positions.
Important Factors:
Bullish verification on the day following the inverted
hammer is required. This verification can be in the
form of the next day opening above the inverted hammer’s
real body. The larger the gap the stronger the confirmation
will be. A white candlestick with higher prices can
also be another form of confirmation.
