Bullish Inverted Hammer Pattern occurs in a bearish background. In a day of inverted hammer, market opens at or near its low. Then prices change direction and we see a rally. However the bulls cannot succeed to sustain the rally during the rest of the day and prices finally close either at or near the low of the day. It may not be clear why this type of price action is interpreted as a potential reversal signal. The answer has to do with what happens over the next day. If the next day opens above the real body of the inverted hammer, it means that those who shorted at the opening or closing of the inverted hammer day are losing money. The longer the market holds above the inverted hammer’s real body, the more likely these shorts will attempt to cover their positions. This may ignite a rally as a result of covered short positions, which may then inspire the bottom pickers to take long positions.
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