It’s Hammer Time for the S&P 500!

by Serge Berger | November 20, 2012 6:30 am

At its lows last Friday, the S&P 500 was just about 8% off its mid-October highs without the mercy of any real meaningful bounce on the way down. As such, it was just a matter of time until many of the weak hands and sell stops were washed out so that a more sustainable bounce could ensue.

Most oscillator indicators — such as the Slow Stochastics indicator on the chart below — were in deeply oversold territory as of Friday morning.

At 11:30 a.m. Friday, however, things changed for the better (well, at least for the bulls).

Just as European equity markets closed for the week, Apple (NASDAQ:AAPL[1]) started to get a bid, and a mere 60 minutes later it had risen by almost 5% off its intraday lows. As we have often witnessed this year, Apple stock tends to behave as a leading indicator in the near-term, and as such, the broader market quickly got better the rest of the day.

After all was said and done, the S&P 500 closed Friday in the green by 50 basis points after having been 75 bps lower in the morning session. As a result of this forceful intraday turnaround, the daily charts of the S&P 500, a good number of its sectors and stocks all around the U.S. stock market had left so-called “hammer candles” on their daily charts.

The appearance of a hammer candle at the bottom of a trend and in oversold conditions is a bullish setup for a trade — especially if followed by a strong up-day the following trading session.

S&P 500 sectors such as the materials, technology and energy sectors, to name a few, all displayed such bullish formations.

The same could be seen on the chart of the Dow Jones Transportation Average

… and also on individual stocks, such KKR & Co (NYSE:KKR[2]), which in this particular case formed the bullish hammer right at its 200-day simple moving average for a little additional confirmation of support.

Bottom line: The aforementioned hammer formations amid these oversold conditions — combined with Monday’s follow-through buying — should be good for another couple percentage points’ worth of upside in the S&P 500.

After that we must re-evaluate, but with any luck, the turnaround that began last Friday may have been the beginning of a rally into year’s end.

Serge Berger is the head trader and investment strategist for The Steady Trader[3]. Sign up for his free weekly newsletter[4].

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