Page 68 - A Complete Guide to Volume Price Analysis: Read the book then read the market

Price action – potential weakness after bullish trend

When I first started using VPA and candles, I always used to assume that a hanging man appearing in a bullish trend was a sign of strength, and
continuation of the trend, since to me this was the same action as the hammer candle. It isn't. It is in fact the opposite, and is a sign of weakness,
provided it is associated with above average volume as shown in Fig 6.16.

Fig 6.16 Hanging Man

And the question is, why is it a sign of weakness? The answer is very simple. The market has been rising steadily on rising volume, when at some
point in the bullish trend, the market sells off sharply, with the price moving lower in the session, only to recover and close at, or near the high of the
session, creating the familiar 'hammer candle price action'. Except here we now refer to this candle as the hanging man candle, as it is now at the
top of a bullish trend.

The reason this candle is considered to be bearish is that this is the first sign of selling pressure in the market. The insiders have been tested, and
the buyers have supported the market, but this candle is sending a signal that the market is moving towards an over sold area. The body of the
candle can be either red or blue, but the price needs to close at, or near the open.

The price action is confirming the appearance of sustained selling pressure, which on this occasion has been supported by the buyers, but it is an
early warning of a possible change. It is an early warning signal, and now we need to watch our charts for confirming signals.

The insiders will have seen this weakness appearing too, and be starting to plan their next move.

The hanging man is validated if it is followed by the appearance of a shooting star in the next few candles, particularly if associated with above
average or high volume. The key here is validation. On its own it is not a strong signal, but merely gives us early warning of a possible change.

For this candle to be validated and confirmed we need to see further signs of weakness at this level, or close to this level, which would then
increase the significance of the candle. For example, a hanging man, immediately followed by a shooting star is an excellent combination and adds
considerably to the strength of the initial signal. Even if the shooting star appears later in the candle sequence, this is still a strong confirming signal,
provided it is associated with high volume.

Stopping Volume

Price action - strength