This pattern appears like a hammer, hence its name:
The long lower shadow of the hammer shows that the stock attempted to sell off during the trading session, but the demand for shares helped bring the stock back up, closer to the opening price, with a green candle indicating the stock managed to close higher than the open, and a red candle indicating that the stock wasn't able to close higher than it opened.
Chart
General Identification & Interpretation
Steve Nison is credited with bringing Japanese candlestick charting to the West. In his book "Japanese Candlestick Charting Techniques" he describes hammer patterns with the following characteristics:
Typical characteristics
Small candle body with longer lower shadow, resembling a hammer, with minimal (to zero) upper shadow
Lower shadow more than twice the length of the body
Occurrence after bearish price movement
Examples of use as a trading indicator
If the pattern occurs after a market decline, it indicates a potential reversal: Bullish (hammer), need not require confirmation
If the pattern occurs after an extensive market rally, it is known as a hanging man pattern, a bearish indicator.
More for beginners
Check out our quick start guide to candlestick charting for more information if you are new to candlestick charting!
