More Hammers Than a Hardware Store

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Into the close, the bulls have a chance to print a significant amount of Japanese candlestick “hammers” on many daily charts, including the financials and small caps. I have written many posts about the hammer over the past year or so, so I wanted to repost a portion of what I wrote during the early part of last summer’s correction. In sum, the hammer is not an automatic buy signal. It is, however, a reason to stalk for signs of a reversal in trend, particularly when we have seen a clear bout of prior selling. Moreover, even if the hammer is confirmed to the upside, it does not mean that the bottom is in forever. Instead, it is usually a sign of an intermediate-term tradable bottom.

From May 25th, 2010:

In Japanese candlestick terminology, a bullish hammer often signals a trend reversal.  Above all else, the hammer  (on a daily chart) shows that the price drops significantly from where it was at the opening bell, yet rallies back towards the end of the session up near the opening price level.  Some key elements are: a prior bearish trend, little or no upper wick to the candle, and a small body at the top end of the hammer.