Bullish hammer ..a perfect trend reversal signal seen in Nifty
The Bullish Hammer Pattern is a significant candlestick that occurs at the bottom of a trend or during a downtrend and it is called a hammer since it is hammering out a bottom. The Bullish Hammer Pattern is a single candlestick pattern and it has a strong similarity to the Bullish Dragonfly Doji Pattern. In the case of Bullish Dragonfly Doji Pattern, the opening and closing prices are identical whereas the Bullish Hammer Pattern has a small real body at the upper end of the trading range.
1. The market is characterized by a prevailing downtrend.
2. Then we see a small real body at the upper end of the trading range. Color of this body is not important.
3. We would like to see the lower shadow at least twice as long as the real body.
4. There is no (or almost no) upper shadow.
Explanation:The overall direction of the market is bearish, characterized by a downtrend. Then the market opens with a sharp sell off implying the continuation of the downtrend. However, prices suddenly turn upwards, the sell-off is quickly abated and bullish sentiment continues during the day with a closing price at or near to its high for the day which causes the long lower shadow. Apparently the market fails to continue in the selling side. This observation reduces the previous bearish sentiment causing the short traders to feel increasingly uneasier with their bearish positions.
If the hammer is characterized by a close above the open thus causing a white body, the situation looks even better for the bulls.
The Bullish Dragonfly Doji pattern is generally considered more bullish than the Bullish Hammer Pattern and a higher reliability is ascribed to this Doji than the Bullish Hammer Pattern.
The reliability of Bullish Hammer Pattern is low. It requires confirmation of the implied trend reversal by a white candlestick, a large gap up or a higher close on the next trading day.