Overview
A hammer is characterized by a long stick with a small body, where the body exists either near the top or the bottom of the stick.
Inverted Hammer
Interpretation
A hammer indicates that there was a trend in one direction of during the period, followed by a reversal back to near the opening price. In the case of the upright hammer, the bears pushed the price down, but then the bulls took over and pushed the price back to near the open price. In the case of a hammer where the close is higher than the open, the bulls won the day.
A hammer indicates a degree of indecision in the market, where the bulls and bears are nearly matched.
A possible price path for a hammer
In Context
When a hammer is seen at some point in during a trend, it may indicate the possibility of a reversal. This is particularly true if the hammer occurs near either support or resistance.
As an example, consider an asset that is in a downtrend. Near a point of support, a bullish hammer is seen. This would indicate that during the day, there was a reversal of the days trend, indicating some indecision in the market. If the close was higher than the open, it indicates that the bulls won the day.