Wednesday, August 3, 2011

Hammer Reversal in Stocks

I don't have time for charts tonight, but the action today made a wide range very nice looking bullish hammer reversal on the SPY etf. It reversed after undercutting the March lows, which makes a solid chart based buy signal. I am taking this reversal higher very seriously in respect of the dramatic series of down days recently.

There are times like the Nov 2008 break of the Oct 2008 crash low, where once an important prior low breaks, the sell stops are run, and then there is no more selling at that time. This results in a dramatic reversal higher. However, like reversals at the 200 day moving average, it is ultimately a trading algorithm initiated move, which is not always a legit shift in market psychology. So it is possible that after a brief pause today's low gets broken and the head and shoulders pattern continues.

That actually feels unlikely to me. Also, a reversal this strong right under the neckline of the head and shoulders is probably not a good sign for bearish traders. I will have to do a little more looking, but I will likely suggest exiting the long wasting inverse ETF trades still open on the blog. However, if the S&P 500 remains below the neckline for a few days and offers any suggestions that it is likely to break lower, then I will consider re-entry.

FYI...Statistically (according to Steve Nison the candlestick guru) the hammer candlestick has about a 60% chance of having future price action move below the mid point of the tail even on successful bottoming candles. So we may see some further churning here for a day or so, before reversal higher. I think the odds are lower than that in this case, but those are the stats from their historical info.

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