All of the bullish engulfing candles, oversized hammers, and bullish piercing line candles printed on Tuesday will not amount to much if the bulls do not confirm the upside reversal with a further move higher sometime in the next few days. It is always a dangerous proposition to place too great a significance on any one Japanese candlestick, which means that enthusiasm should be tempered for now. As evidence, consider the carnage that impacted bulls who automatically assumed the “hammer” printed on the S&P 500 daily chart on August 3rd of this year meant we had certainly bottomed. Not only did we crater the next day, but we have not come within 30 S&P points of the highs of that hammer since.
Should the bulls mean business this time, though, the issue is where to look for longs. You can pick through beaten-down garbagio, such as FWLT PWER TEX, but I have had more success sticking with winners who had outperformed a nasty market. Two such names are seen below. Note how price is above all moving averages with solid volume patterns to boot–Quite an accomplishment considering the ferocious broad market selling we have seen.