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The Traders Wheel
 12/21/98 by Alan Farley

Hammer Time

Technicians throughout the world have adopted the Japanese practice of candlestick charting. In fact, many have abandoned Western bars in favor of this visual tool that generates detailed information from short-term price movement. Of all candlestick patterns, single bar hammers and dojis provide the most versatile immediate feedback. Western technical analysis rarely offers such dependable single bar signals.

These formations print when a significant battle between bulls and bears ends in a draw. Two characteristics generate their predictive power:

  1. 1. High to low range greater than average.
  2. 2. Closing tick equal to or near opening tick.

Dojis represent perfect opening-closing balance as price finishes exactly where it started. Hammers need only close so that the central body of the candlestick is less than one-third the length of the bar’s total range. But the body must sit near one end of the bar’s action.

Dojis and hammers predict immediate reversals within the time frames they are created. Their significance directly relates to their position within the overall chart pattern. When appearing on high volume near significant highs or lows, they may represent price extremes signifying an important change in trend. If printed within an ongoing congestion pattern, they often reflect market makers or specialists "cleaning out" stops in one direction so they can move the market in the opposite direction.

Retracement science assists traders in predicting events subsequent to one of these important candles. Shifting down one time frame from the bar reveals the length of the short-term trend being reversed by the long finger. Very often, dojis and hammers represent first rise/first failure setups within the smaller time frame. This further predicts where the reversal momentum will fade for a test of the candle.

Following a doji or hammer reversal, a test of the candle high or low often takes place within 3 to 5 bars. When the test fails, expect price to thrust sharply forward, especially when overbought/oversold indicators show no divergence. When the test succeeds, shift down one time frame again and trade the setup according to double bottom/double top strategy. Specifically look for price to surge on the breakout past the high/low of the initial reversal generated by the candle.

dell.gif (4325 bytes)

 

Hundreds of stocks printed long-legged dojis and hammers during the dramatic October 1998 reversal day. DELL never returned to test its low following a death-defying leap into the abyss. Pay close attention to gap support or resistance created by the bar following the candle event.
altr.gif (4485 bytes) Price returns to test ALTR’s new high doji and reverses. Reviewing this chart on a 5-min intraday interval reveals a classic double top scenario. Aggressive traders often enter short sales at doji tops, recognizing their hidden power.

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

Published By Tulips and Bears LLC