We certainly had some interesting action yesterday. The S&P 500 bounced just a couple of points above its 200 day moving average, while the Dow sliced through its 200 DMA (currently at 10,006) and the 10,000 level. It gave a good effort to bounce back above both levels but didn't quite make it. I was expecting a late day rally which would print hammers on the charts of the indices, but the buyers never fully stepped up. Given how weak yesterday's bounce was, I was very surprised to see how many hammers and doji were made yesterday in individual stocks. A full 20% of the stocks in my universe of stocks made hammers. Normally I'd be all excited and ready to buy, but not today. The problem is that the vast majority of those stocks are locked in steep downtrends. I will always give more weight to the prevailing trend vs. a candlestick pattern. The hammers (or other bullish reversal candles) I like are the ones that occur on a retracement in an uptrend. So as far as I'm concerned most of the hammers made yesterday are warnings to shorts to cover but not signals to go long. Here are a couple of examples of the types of hammers made yesterday (some of these are not textbook hammers, but they're close enough for government work):
So my outlook is still the same -- we're certainly due for a bounce but I'd rather let the market lift and then look for shorts. Of course I'll try a few longs (if they trigger) on some of the stocks that are still in uptrends but I'll be real quick to bail if the market turns over.
As much as I love hammers, I always need this type of schooling to remind me to keep in mind the overall context of the hammering!