A hammer materialized on the December oat futures chart on Monday, April 27, 2015. Hammers are reversal patterns that appear at market bottoms on candlestick charts and are bullish, as they are said to be “hammering out a bottom.”
The hammer represents a period in the market where an intraday sell-off is met with strong supportive buying returning prices back near the open. Since this hammer emerged, the December oat futures rallied 43 cents per bushel before running into resistance at $2.80. A decisive close above $2.80 is now needed to turn this market up.
During a period of falling prices, there comes a time when prices are in a near-vertical drop. A hammer is a reliable indicator that the decline has come to an abrupt halt. A hammer occurs when a market opens lower than the previous day’s settlement price, has a significant intraday sell-off, only to claw its way back up and close at or near the high of the day. For a hammer to be valid, the exact high must be the opening or closing price of the session.
In a candlestick chart each day represents a candlestick, which is similar to a bar on a bar chart which indicates the open, close, high and low of the day. On a candlestick chart, one can determine at a quick glance if the market settled above or below the opening price.
The difference between the opening and closing price is the real body. If the body is black, this represents a dark day, with the settlement price being lower than the opening. If the body is white or open, it indicates the market’s close was above the opening for that period.
A long black body illustrates a bearish period in the market with an opening near the day’s high and close near the day’s low. The long white body is the opposite of a long black body and shows technical strength with an opening near the low and a close near the high in a wide-range period.
The lines above and below the real body represent the high and low ranges for the period and are called shadows. In a hammer, the price range below the body is the tail. For a hammer to be valid, the tail (shadow) should be more than twice the height of the body.
There will come a point during a bear move when the decline begins to accelerate sharply. This tends to be on the heels of bearish news and is when much of the patience of those waiting for the market to turn back up will have worn thin, and an increase in selling hits the market at the prevailing price level, driving prices down to a new low for the current move.
The following day, the market encounters a large supply of contracts for sale at the opening bell and prices begin to weaken. During the same session, the selling moves down to the market, creating more pressure and when prices fall below the previous day’s closing level, additional selling materializes.
After dropping to a new low, the market ends the session on a strong note, but often lower than the previous day’s close. The initial buying which halts the decline is predominantly by large-market participants and is a combination of shorts taking profit and longs establishing positions.
When the market finally does turn up off the low, it will be because the selling has either been totally satisfied or the volume of buying simply overpowers what little selling remains.
Identifying reversal patterns, such as the hammer, provides farmers with the confidence to sit tight amidst bearish news. In this example, patient farmers were rewarded with a 40-cent rally.
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