Technical Analysis: Hammer
One of my favorite technical analysis chart patterns is the hammer. The best hammer patterns happen at the end of a long downswing and on very high volume. The following graphic from Investopedia on the hammer explains the pattern well:
In essence, the price falls significantly from the open, and rises back to near or above the open to close for the day. The rationale behind this pattern is that after a long downswing, the selling climaxes in this one day. The hammer pattern exemplifies a final massive sell-off by the bears and then the bulls come sweeping in and bump the price right back up because they believe they are purchasing a bargain.
American International Group (AIG) has a textbook hammer in the making:
Stock Investing Notes For Beginners:
- Large sell-off prior to hammer
- RSI under 30 indicates oversold
- Very high volume relative to average volume
The key with hammers is to find as many indicators that confirm that a bottom has formed. Furthermore, I typically wait for a follow-through up day on the next trading day, which highly increases the probability of a true bottom.
Could we have seen a hammer in broad markets today? Nearly all of my holdings, the DJIA, and the NASDAQ exhibit varying degrees of hammer-ness in today’s chart. The DJIA by mid-day had officially corrected 10% from a high of 14000. Cross your fingers… HP, JCP, and Nordstrom all beat estimates and all guided higher. Could this be the catalyst or will credit worries keep holding us down. Oh well, all the better. More bargains!
[…] close on Thursday, however, investors had rallied and I was quite pleased with the appearance of hammers throughout the charts of several of my personal holdings as well as in the charts for the DJIA, […]