Securities Research Services

Monday, October 06, 2008

Hammers Are NOT Giving Us An All Clear Signal

We really wanted to get in there tomorrow and start picking up some of these beaten down shares that are just sooooo technically extended at this point. Today we scanned for hammer bottoming signals and incredibly more than 1100 showed up in stocks that trade more than 200k shares per day.

Hammer buying signals are signals which occur when the price washes lower for the day but then experiences a rally late in the day and closes near the opening price.

We have decided against buying any new shares tomorrow as the hammer signals we found have some problems with them, which we will explain.

First, let’s take a look at a classic hammer buy signal put in by the stock STLD today.

Note that STLD was able to close out the day near daily highs after quite a frightening sell off intraday. Typically this type of trading gives us an indication that capitulation has taken place, which is a pretty good buy signal under the right circumstances.

Nevertheless, the hammer signal on STLD has some problems; not the least of which there is no clear support in sight. Even more problematic, however, is the fact that we don’t have strong evidence that late day buying was serious. In fact, just the opposite is true.

If we drill down to STLD’s intraday chart (hourly) we can get a better look at the seriousness or lack thereof that late day buying entailed. STLD sold off on heavy volume, which is potential capitulation, but where is the buying volume late in the day?

Clearly late day buyers were not very enthusiastic. In fact, the late day bounce looks to us to be more of the short covering variety than it does serious institutional interest or program trading.

This intraday picture is repeated over and over in the market today. Yes we had a late day bounce. No, that late day bounce does not give us the all clear signal.

We are probably near a tradable bottom, and if tomorrow we see a rate cut in the US and Europe then buyers might start getting serious. But for now, all we have seen is a late day lull in the selling and that is no reason to buy stocks by any shape or means.

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