Hammer or Hanging Man: A candlestick with a small body and long lower shadow. This candlestick tells us that when the market opened sellers started to sell pulling the price of the stock or index down. But, toward the end of the day buyers jumped in and pushed the stock or index back up, where the closing price ended near the opening price. This price action tells us that the buyers thought that the stock was undervalued and oversold. With this said, if we start to see long shadows like this, it could be a signal that a direction in trend might be coming.
Hanging Man: If the stock or index has been in a up-trend and we see this formation, it’s called a Hanging Man, and many times it’s an indication that the trend is topping out.
Hammer: If the stock or index has been in a down-trend and we see this formation, it’s called a Hammer, which many times is an indicator that the down-trend has hit a bottom.
Doji: A candlestick with a very small body and long upper and lower shadows. The open and close for the day, therefore, was the same or almost the same telling us that investors have indecision of where to take the price of the stock or index.
Gravestone Doji: A candlestick with a very small body and a long upper shadow. This formation is an excellent indicator in calling a top of an up-trend where buyers push the stock or index up, usually on lower volume, and then sellers jump in and push it back down to where it initially opened.
Shooting Star: An additional formation that is a good indicator of calling a top and where the probability of the stock or index rolling over and beginning to head down increases substantially.
Bullish Engulfing Pattern: This is a bullish formation where day 1 closes as a down-day, but day 2 starts with a gap-down at the open, and then buying ensues where the buying pressure completely “engulfs” the prior day’s price range.
Bearish Engulfing Pattern: This is a bearish formation where day 1 closes as an UP-day, but day 2 starts with a gap-UP at the open, and then selling ensues where the selling pressure completely “engulfs” the prior day’s price range.