Hanging Man

HANGING MAN Paper Umbrella (Karakasa)

Description

The Hanging Man is comprised of one candle. It requires a lower tail two times greater than the body. Its name is derived by the Japanese; explaining it looks like a hanging man. The body is the head and the tail is the dangling feet. The Hanging-Man and the Hammer signal have the same characteristics but the Hanging Man is found at the top of a trend while the Hammer is found at the bottom of a trend.

After a strong up-trend has been in effect, the atmosphere is bullish. The price opens higher but starts to move lower. The Bears take control. Before the end of the day, the Bulls step in and take the price back up to the higher end of the trading range, creating a small body for the day. This could indicate the bulls still have control when analyzing a Western bar chart. However, the long lower shadow represents that the sellers started stepping in at these levels. Even though the Bulls may have been able to keep the price positive by the end of the day the evidence of the selling was apparent. A lower open or a black candle the next day reinforces the fact that selling is starting.

The Hanging Man signal has a deeper analysis applied to its message. An investor, being in a bullish frame of mind, will be a little bit nervous upon seeing the selling during the day. However, by the end of the day the price has moved back up toward the top of the trading range. Although a little bit ner­vous during the day, the Bulls are relieved that the buying still seems to be around.

What the Japanese have witnessed is the nervousness that the Hanging Man signal creates. If prices opened lower the following day, the nervous Bulls from the previous day start saying “shoot, the Bears are back again, get me out of this trade.” Essentially, the Hanging Man signal is the first sign that the sellers might be coming in. A lower open, or more selling the following day convinces the Bulls that is time to get out of the position.

Criteria

1.     The upper shadow should be at least two times the length of the body.

2.    The real body is at the upper end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.

3.    There should be no upper shadow or a very small upper shadow.

4.    The following day needs to confirm the Hanging Man signal with a black candle or better yet, a gap down followed by a lower close.

Signal Enhancements

1.     The longer the lower shadow, the higher the potential of a reversal occur­ring.

2.    A gap-up from the previous day's close sets up for a stronger reversal move provided the day after the Hanging Man signal trades lower.

3.    Change Large volume on the signal day increases the chances that a blow- off day has occurred although it is not a necessity.

The Hanging Man, followed by continued selling the next day, is a rela­tively high probability ‘sell’ signal. When a trend is in the overbought condition, the hanging man signal definitely needs to be addressed. As with the Hammer signal, the longer the lower shadow in a Hanging Man signal, the more likely the Bulls will be nervous upon seeing a lower open the next day.

A gap-up at the top, followed by selling also signifies the sellers were showing up immediately after the opening price. This is in keeping with the candlestick analysis of where to start looking for candlestick sell signals, the exuberant buying indications at the top. As viewed in Fig. 2-40, the PMC Sierra chart, the gaps up in the overbought condition provided a forewarning that a top was nearby.

The immediate sell-off indicated there was no new buying after the open. Al­though some buying occurs before the close, the Hanging Man signal now becomes an alert. This is a signal that would definitely not show up in Western charts. The gap down in price the following day would have been an immedi­ate indication that the sellers were now controlling the trend.

Identifying a Hanging Man signal, along with other candlestick signals at major potential resistance levels, adds more credence to a reversal signal oc­curring. Illustrated in Fig. 2-41, the Micrel Inc. chart, the Hanging Man signal occurred right on a major moving average. This allows the candlestick investor to immediately evaluate what might be happening at an important technical level that other investors are watching.

Understanding what should occur after a Hanging Man signal, with a high probability that a downtrend is in the making, allows an investor to close out a position more quickly and confidently than other investors waiting for better confirmation.

The ultimate Hanging Man is the “Dragonfly Doji”, which has an open and close near or at the very top of the trading range. As illustrated in Fig. 2-42, the Brightpoint Inc. chart, a Hanging Man/Doji formation creates a visual alert. Witnessing a much lower open the next day provides confirmation that the uptrend is over.

The Hanging Man signal, in an overbought condition, requires immediate at­tention. The lower trading during the day made the Bulls nervous. More selling the following day convinces the Bulls to be out of a trade. Remember, centuries of observations have revealed this to be a major signal.