The Inverted Hammer candlestick is a subset of the spinning top candlestick pattern and looks exactly like the Shooting Star candlestick pattern which we reviewed last month.
As with the Shooting Star, the Inverted Hammer has a very long upper wick or shadow, which is usually two to three times the size of the candlestick's body formation. This represents the price of the stock opened during the period and went higher in a strong move. However, the candlestick body's size is smaller than an average candlestick and reflects the failure of the bull's price push to hold its ground, and in response, it fell back, ending the period slightly above where it started.
Finally, there is little to no lower wick or shadow, which means even though the bulls failed to retain much of the ground they moved during the period, the bears' counterattack had a minimal effect against the stock opening numbers; the bulls stood their ground.
Regardless of the candlestick's color, as it can be either black (red) or white (green), the candlestick's meaning as a weak bullish reversal signal remains the same. Below is an example image of an Inverted Hammer where the market closed up for the period.
Like the Shooting Star candlestick, the Inverted Hammer is a reversal signal. A Shooting Star candlestick is a sign of an upcoming downturn in the price of the stock and on the flip side an Inverted Hammer is a sign of an approaching upturn in the price of the stock.
As with the Shooting Star, the position of an Inverted Hammer candlestick on a candlestick chart is of utmost importance as it needs to be found at the end of a downward trend to be considered a bullish reversal signal. If you find an Inverted Hammer at the end of the down trend, then you should keep your eyes on this stock’s activity in the next period to confirm a full bullish reversal and possible entry for a long trade.