After Wednesday’s close we posited on Twitter:
$COMPQ $QQQ – Did today’s price action form a bullish hammer candle or a bearish hanging man candle?
The opening and closing range of both the hammer and the hanging man is situated in the upper range of the candle, and each has a long tail or shadow. They are considered reversal candles, but the two have completely opposing implications for a stock going forward. The hammer generally forms at a bottom and price proceeds higher, and the hanging man forms at a top and price moves lower.
The narrow high range close on Wednesday took place after a short term uptrend, as opposed to a downtrend, so what looked like a traditional hammer candle was actually a hanging man candle.
Wednesday’s hanging man candle was followed in Thursday’s session by a large down-day candle, and was preceded in the Tuesday session by a large up-day candle. These three candles form an eveningstar candle pattern. An eveningstar is a three day bearish reversal pattern, and represents a transition in trader sentiment form bullishness-to-bearishness.
This pattern appears on all the major index charts, and the implication is the October 11 low is going to be retested. This would be a crucial inflection point for the broad market.