A Hangman and A Hammer Are Identified in Gold and the Dollar Index

Gold closed fractionally higher after trading to the lowest price this year. Trading $10 lower and under pressure today, gold reached an intraday low of $1,281.20. The last time gold traded to $1,281 was December 22 of last year. The key distinction was that, during December 2017, gold had begun a dynamic rally after hitting a low at $1,238.

Today’s dynamic price reversal occurred as a direct result of extreme dollar strength that weakened tremendously after coming within ticks of 94 on the dollar index. The dollar closed fractionally lower on the day at 9,347, which is a net decline of about seven points.

In trading today, both the U.S. dollar and gold resulted in a candlestick pattern on a daily chart that is from the umbrella line group. This group of individual candlesticks is unique in that their position in a trend determines their identification. The same candle found after a defined uptrend has a different naming convention then if found during a downtrend. The four candles in this group are all indicative of a potential trend reversal.

The group is composed of two distinct candlestick types which are each divided twice: the hangman and hammer, and the shooting star and inverted hammer.

The hangman and the hammer are identical in composition. However, while they look alike, the hammer occurs only after a defined downtrend. If this candlestick type is found after a defined uptrend, it is labeled as a hangman.

Both candlestick types require a narrow range between the open and closing price which forms the real body of the candlestick. They also require a wick (tail) below the real body that is at least three times the length.

The shooting star and inverted hammer are very similar to the hammer and hangman, with the key difference that the tail or wick occurs above the real body.

The price recovery in gold today resulted in the formation of a hammer. This candlestick type only occurs when selling pressure creates a new trend low, at which time buying reverses that trend and closes very near the opening price.

The exact opposite occurred in the dollar index today, which resulted in a shooting star candlestick pattern. This candlestick type occurs after a defined uptrend and begins with a new record high for the current rally. This is followed by selling pressure taking pricing close to the open.

In each case, these candlesticks require a confirming candle the following day. Therefore, it will be interesting to see if we get follow-through price weakness in the dollar index and higher pricing in gold tomorrow which would confirm the simple one-day patterns.

Wishing you as always, good trading,