Is Inverted Hammer Bullish or Bearish?

Candlestick patterns are fundamental tools in technical analysis, offering visual insights into market sentiment and potential price shifts. These patterns distill price data into a single candle, representing a specific period’s open, high, low, and close. The Inverted Hammer stands out as a widely recognized pattern, signaling a potential change in market direction.

Characteristics of the Inverted Hammer

The Inverted Hammer candlestick pattern presents a distinct visual signature on a price chart. Its primary components include a small real body, which can be either hollow (typically indicating a close higher than the open) or filled (indicating a close lower than the open), located at the lower end of the trading range. A prominent feature is its long upper shadow, which extends upwards and is generally at least twice the length of the real body. Conversely, the pattern exhibits little to no lower shadow.

The small real body indicates that the opening and closing prices were relatively close. The extended upper shadow signifies that buyers managed to push prices significantly higher during the period, even if they couldn’t maintain those gains by the close. The Inverted Hammer typically forms after a sustained downtrend, appearing near the bottom of a price decline. This placement suggests that the selling pressure that defined the downtrend may be weakening.

The Inverted Hammer as a Bullish Indicator

The Inverted Hammer is considered a bullish reversal pattern, particularly when observed at the conclusion of a downtrend. Its appearance suggests that the bearish momentum, which had been driving prices lower, might be losing strength. The market psychology behind this pattern reveals an attempt by buyers to assert control.

During the period represented by the Inverted Hammer, sellers initially maintained pressure, pushing prices down. However, significant buying interest emerged, causing prices to rally considerably from their lows, as indicated by the long upper shadow. While sellers might still manage to pull prices back down towards the opening level by the close, the strong intra-period buying suggests that buyers are testing higher price levels and potentially gaining confidence. This shift in dynamics, where buyers show a notable presence after a period of decline, signals that the downtrend could be nearing its end and that upward price movement may follow.

Confirming the Inverted Hammer Signal

The Inverted Hammer, while signaling a potential bullish reversal, requires confirmation to increase the reliability of its indication.

A strong bullish candle immediately following the Inverted Hammer provides significant confirmation. This subsequent candle should ideally close higher than the Inverted Hammer’s closing price, indicating follow-through buying pressure. Increased trading volume accompanying the Inverted Hammer itself or the subsequent confirmation candle can further strengthen the signal, suggesting broader market participation in the potential reversal. Additionally, if the Inverted Hammer forms near a recognized support level on the chart, its bullish implications are enhanced, as support levels often act as floors where buying interest tends to emerge. Combining these elements helps traders validate the pattern and gain greater confidence in the probability of a trend reversal.