The inverted hammer is a bullish reversal pattern that is often found at the end of a downtrend or correction. While it may look like a topping tail or shooting star which often signals a bearish reversal, the inverted hammer that appears after the stock has been dropping for a while shows a sign of strength. That's because the stock tries to move higher but the bearishness of the downtrend still has some effect on the stock.
The diagram above shows how an inverted hammer looks like. The pattern appears after the stock has corrected for a few bars. Then the stock tries to move higher but because the stock is in a downtrend or correction, the bearishness in the stock still rules. The bears pushes the stock down from its high to form a kind of topping tail.
Many will think that this is a continuation of the downtrend or correction but when you see a pattern like this appear near price support or important areas of support, it is a first sign of bullishness in the stock. The bulls are trying to push the stock higher.
While the body can be red or green, in my opinion, a green body which signifies the stock closes higher than the open is more potent and more powerful. It shows that the bulls were able to defend the assault from the bears and keep the stock higher than the open.
The chart above is the 5 minute chart of GRFS which formed an inverted hammer in the daily chart. The stock tries to move higher at the beginning of the trading day but towards the afternoon the bears pushes it down. While this may look like the bears are winning, it actually tells us that the bulls are trying their very best to move the stock higher. It is a first sign of strength in the stock.
In the daily chart of EL above, the stock was drifting lower until it formed a bottoming tail and an inverted hammer. In this case, the bottoming tail signaled a first sign of strength while the inverted hammer acts as a confirmation of bullish strength coming in. When the stock traded above the highs of the inverted hammer, the bullish pattern is confirmed.
The chart above shows EQIX having two inverted hammers. It was a powerful signal to us that the stock was trying to move higher. When the stock traded above the highs of the second inverted hammer and traded above the downtrendline and the 20 MA, this told us that the downtrend is over.
Inverted hammers that appear at important moving averages like the 200 day moving average and important price support areas can be very powerful bullish reversal patterns. In the chart above we can see ESS formed an inverted hammer at price support and the 200 day moving average. The combination or candlestick pattern and support areas pack a powerful punch and hinted of a reversal to the correction.
In the chart above, FFIV had a big gap down and had a bearish red bar. However there was no immediate follow through to the bearish red bar. Instead, a bullish inverted hammer formed the day after the big large red bar. Although the stock continued to drift lower, the presence of the inverted hammer told us that there was actually some strength in the stock. Then a bullish engulfing pattern formed and gave us another bullish signal. The stock eventually went higher. That's how powerful candlestick patterns can be especially when you have two bullish reversal patterns nearby.
In the chart above, you can see GE in a downtrend. The stock look like it could go lower but then an inverted hammer formed. The next day, the stock gap up above the inverted hammer in bullish strength. It also went above the 20 MA. This was a powerful signal that the stock may be reversing. The stock eventually went above the 50 MA and a new uptrend started.
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