I pointed out the clear hammer candlestick that appeared in myriad charts yesterday as the market rebounded from its intra-day low to close higher for the day. Today’s inverted hammer candlestick is also very important to notice. Perhaps even more so in light of the recent downtrend and the previous hammer.
According to traditional Japanese candlestick interpretation, when an inverted hammer candlestick appears after a significant downtrend (like now) it signals the end of the downtrend and an imminent trend change. An inverted hammer may seem to be a strange pattern upon which to hang expectations for a bounce higher. After all, isn’t it the opposite of a hammer? doesn’t it indicate that the bears pushed back the bulls from the intra-day high? Yes, and no.
An inverted hammer by the way looks exactly like a “shooting star” the only difference is that the latter is printed subsequent to an uptrend while the former arrives after a downtrend. You can think of it this way: the bears are starting to cover their short positions, pushing prices higher. But this new higher price is met with a relief by longs with weak hands who are happy to receive a good opportunity to exit.
Since there is no guarantee with this pattern (or any other Japanese candlestick pattern) it is important is to watch for confirmation. When, or if, price closes above the body of the inverted hammer, then we have even stronger indication of a trend change. By the way, this is the same congestion level at 1080 I mentioned yesterday I wanted to see cleared.
The other point I wanted to cover is a familiar measure of breadth for the Dow. Because there are only 30 stocks in the Dow Jones, the percentage of them trading above their moving average tends to be “chunky”. However, just like the measure for the S&P 500 index (which is smooth thanks to 500 constituents), this indicator is pointing to an extremely oversold market right now since there are zero Dow components above their 50 day moving average. The last time this was similarly oversold was back in March 2009.
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