The year has started in a relatively muted fashion with the market not really going anywhere since January 3 on a closing basis. As the SPDR S&P 500 (ARCA:SPY) ETF continues to range and converge within a tighter price area, individual stocks are showing more concrete technical signals for future direction. A hammer candlestick pattern looks likes the name implies. Classically, it is seen at or near the end of a decline and is composed of a small real body (difference between open and close) but has a long lower shadow (day low is much lower than close). This one-day price pattern shows a reversal in sentiment, and forces bears to question their positions, and provides bulls with something to be optimistic about. These four stocks have all seen hammer candlestick patterns in the last couple days, and that could mean further upside, as these stocks may have hammered out a short-term bottom.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
Arthur J Gallagher & Co. (NYSE:AJG) created a large hammer candlestick on Thursday. The stock opened at $32.60, dropped to $32.01 and then rallied aggressively to close at $32.84 (just two cents off the day high). The moves shows conviction from the bulls after the stock recently declined from $34 to $32. Hammers are often associated with a turning point, and therefore, present a potential buying opportunity. A purchase can be made near the Thursday high, or alternatively wait for a pull back toward $32 (which may or may not occur). Stops can be placed a bit below $32. The 52-week high is at $33.99; therefore, if this stock is going to move higher it needs to break that level. If it does, the initial target is $36. (For related reading, see Day Trading Strategies For Beginners.)
DCP Midstream Partners (NYSE:DPM) is not a classic hammer pattern in that the stock has not been declining, in fact it has been in an aggressive uptrend. On Friday the stock opened at $48, hit an intra-day low of $46.92 and then rallied to close (also an intra-day high) at $48.17. Even with the sharp rise the stock has seen since mid-December, bulls saw the intra-day sell-off as a buying opportunity and stepped in. The 52-week high is not far away at $49.13, and if the stock is to continue higher it will need a break through that level. The next target is at $52. An entry can be taken now or on a pullback toward $47 (which may or may not occur). Stops can be placed below $46.90. (For related reading, see Introduction To Types Of Trading: Momentum Traders.)
Magellan Midstream Partners (NYSE:MMP) is another stock that got hit with selling mid-day Friday and then aggressively rallied back. Like DPM, this stock has been moving higher recently so it is not a classic hammer candlestick pattern. While not classic, the pattern does show that the bears don't hold much power at the moment, and by the end of the day, on Friday bulls had regained control. The close at $68.93, after hitting an intra-day low of $65.48, is not far from the 52-week high at $69.60. Stops can be placed below $65.40 with an entry as low as $65.48 (which may or may not occur). The profit target is $74.50; therefore, trying to be patient and waiting for a bit better price will make the risk-to-reward ratio more favorable. (For related reading, see Mastering Short-Term Trading.)
Reynolds America (NYSE:RAI) pulled back to support at $40 intra-day Friday but ended up closing very near the high of the day at $40.44. The hammer candlestick pattern shows bulls were willing to support the stock above $40 after the recent decline from $42. With the pullback, the stock provides a good reward-to-risk ratio if the hammer signified a turning point and RAI begins to move higher once again. It has been a strong stock, up 21.7% over the last year. Long entries can be taken near Friday's close or on a pullback toward $40 (may or may not occur). Stops can be placed below $40. The 52-week high is at $42.18, which could be tested as long as $40 holds as support. If the 52-week high is surpassed the next target is $44. (For related reading, see Scalping: Small Quick Profits Can Add Up.)
The Bottom Line
Hammer candlestick patterns represent a shift in control. What appears to be bearish by days end shows that bulls have regained control. A classic hammer pattern occurs after a stock decline, although the hammers in DMP and MMP were not preceded by a decline. Rather these hammers occurred in the midst of an uptrend, creating a large intra-day correction which may signal further upside. AJG and RAI did witness recent corrections and the hammers may indicate a short-term bottom is in place. The low of the hammer is often used as a stop level to control risk with entries taken near the hammer close or waiting for a pullback toward the hammer low. (For related reading, see Introduction To Momentum Trading.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.