In technical analysis, one of the “candlesticks” we can look for in a downtrend and after a significant sell off is called a “hammer” candle.
This candlestick pattern often serves as an early indication of a potential bullish reversal, signaling that selling pressure is beginning to wane.
The hammer candlestick is differentiated primarily by three defining features:
- The real body (open-close area) of the candlestick is relatively small, with little to no upper shadow
- A long lower shadow – at least twice the size of the real body
- Typically appears in a downtrend/selloff and signals buyers are coming in at lower levels
(Note: When a hammer candlestick appears at other technical levels of interest or areas of confluence—such as support, Fibonacci retracements, or moving averages—they become increasingly stronger signals!)
Hammer Candlesticks:
We can see a recent example of a hammer candlestick pattern with a short-term bullish price reversal in the daily chart of Eli Lilly (LLY):
(LLY) Daily Chart – Longer Term View:
- Price breaking a longer-term upward diagonal support line/retesting/ and then selling off
- Recent price trading around a longer term and key 38.2% Fibonacci retracement level (From the March 2023 lows to the August 2024 highs)
(LLY) Daily Chart – Zoomed in View:
Note:
- The hammer candlestick occurred on 11/18/24, with price reaching a daily low of $711.40 but buyers coming in (long shadow or “wick” underneath) and pushing price back up higher to close above the longer term 38.2% Fibonacci level.
- The following day 11/19/24, price only reaches an intraday low of $712.42 (vs the prior days low of $711.40), then starts moving higher and AGAIN back up above this 38.2% fib line, eventually closing up green AND above the prior day close. (This collective price action is telling us that sellers are losing control and downward pressure is subsiding.)
- On 11/20/24 (currently intra-day and as of this writing), price gaps up on the open and continues to reverse higher in the near term.
Candles help you spot potential reversals, but you need to stay on top of overall market trends as much as you can. And you can do that with Market Rover!
……Happy Trading!
