Hammer Reversal Should lead to Bounce

The hammer candlestick printed today on the close is a pretty good hint that the market is ready to bounce up now.  The question is how many days will it be able to do so.

It would seem a bit unusual for the market to close higher tomorrow given we have the jobs number in the morning and it is the Friday before the long holiday weekend.  But maybe the market does not care about that and maybe there will be enough short covering tomorrow to close the market strongly higher perhaps in the 1050 to 1070 range.  To keep the bearish acceleration scenario intact I really would not want to see any higher than that.

Maybe the market will tread higher tomorrow and Tuesday after the holiday weekend?  One might assume that those two days could be very low volume days which would fit nicely in the overall pattern.

There is lots of downward momentum right now and I doubt that this rally will last more than one or two days but I could be wrong.  We are hugging the lower bollinger band right now as well and could rally right up to the midline.  This is exactly what happened in 1987 before the big fall.

I should also say that the recent decline although quite persistent has been lacking somewhat in the blockbuster volumes (for example like the May 6, 2010 volume) necessary to keep the trend going down with enough force.

So a one or two day rally could get us right back up to resistance and then build a bit more cause for a resumed move down again.

Sometimes reversal hammer candlesticks fail and price just keeps going.  During the up move of March 2009 to April, 2010 there were plenty of  reversal hammer candlesticks that failed.  I doubt that will happen tomorrow and Tuesday of next week but lets see how high the market is able to bounce.

I still see 950 as the ideal intermediate term target perhaps by mid July or slightly sooner.

Posted in Index Trading, Market Timing, SP500
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4 comments on “Hammer Reversal Should lead to Bounce
  1. Geoff says:

    Ok, now, to me, you are really getting confusing. Yesterday, you started off your post by saying:

    quote Everything I am looking at right now suggests to me we are about to ‘engage’ on flash crash part II during the next 3 trading days. I am talking a one day 7 to 10% down day during one of the next 3 trading days. unquote

    I would have thought that today’s close about 120 pts off the early 11am low would have qualified as the bounce. But you now seem to suggest the market needs a more sustained bounce that may delay the “inevitable” swoon to S & P 950 by mid July – – – which certainly eliminates yesterday’s prediction quoted above.

    I am simply confused, and frankly your commentary is coming very close to losing me and my interest.*

    I think the market stocashistics are getting low and market getting oversold, but they can stay that way for a while. Just like high stocastisitics can stay that way for an unbelievable 30 to 60 days during which time the market moves relentlessly higher – – slowly (e.g. March / April 2010).

    Maybe we are in for the same scenario but relentlessly lower. There simply is very little good news out there.

    * I had written more to this footnote but decided to delete.

  2. Gooner70 says:

    Geoff — I have been following Tom for a while….. — If he is correct with his 1987 comparison, then a bounce would not be out of order here. in 1987 it bounced by 35% of the prior decline, (following a hammer like candle). A correction of the same magnitude would take Sep S&P to around 1047/50, though the old support at 1040 may be tough to overcome…

    — I also would add that markets never repeat but rhyme,,,, so to expect an exact repeat is unlikely. For example last Friday/Mondays breid consolidation did not occur in 87, and the hammer bounce occured before the break of the equivalent support line. — One must also consider the possibility that this whole correlation is purely co-incidental.

    — At the end of the day,, it is your choice to read Tom ,and take trades based off his analysis. However no anylysis is foolproof, and Tom is quite correct to make adjustments as and when market give possible signals..

    Best of luck whatever happens…

    Gooner70.

    Furthermore, with a long weekend ahead,

  3. Tom Tom says:

    Geoff,
    We may not bounce that much but maybe most of it happens after the holiday cheer over the weekend. Reason for bounce is in part due to 87 pattern similarity. Other reason for bounce is that it is very common for price to rally right back up to the neckline of a head and shoulders break down. Another common reason is for price to rally back up to the break down point of a long uptrendline. Last reason for the bounce is that we printed that reversal candle yesterday, but as I indicated in my post sometimes market ignores those candles as it did during 2009 run up. I probably should have put up a chart to better reference my post but will do so anyway before the weekend.

  4. Geoff says:

    thanks to both of you for your replies.

    the market today (Friday) as i write this (12 noon) is 78 pts and maybe a double bottom to yesterdays action! ?

    on the TZA message board today someone posted a Goldman Sachs presentation dated June 25th – – -it was meant only for clients with $50 million + and NOT for the public. it is 31 pages long. . . it projects the market heading to SP 865 – – – it is an incredible powerpt!

    the TZA message board (on Yahoo Finance) is absolutely loaded with comments with the general consensus of a steep decline coming or continuing (that may be a contrary indicator – – but many of the posters seem to have reasonable explanations for their bearishness

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