Have you read my book Sideways? Or have you signed up for my new Technical Analysis course? If you have done either of those things, you will know that one of the reliable neartermed reversal signals you can see on a chart is a “hammer” candlestick. A hammer occurs when the market falls sharply from the open, then reverses and actually ends up closing near to, or HIGHER than its open. This, despite the massive downside witnessed in the early part of the day.
A hammer with a higher close (green hammer on the left – also can be white) is a particularly bullish formation. It indicates that the crowd has capitulated, and then the smart money has stepped in near the end of the day to buy cheap stocks off of weak hands. Moreover, they pushed it higher than the open, a sign of a complete reversal in the washout. And that, my friends, is what we witnessed Monday.
Below is a daily candlestick chart. Yesterdays capitulation was a washout and hammer reversal. This reversal put the market right back above support from October. In other words, the market did NOT violate its last significant low from October 2021, despite its crack of the 200 day moving average (not shown on chart) which now sits around 4410. This candlestick reversal and move above the October low indicates a high probability of a pending upside move in the near-term. Its a beautiful thing to behold.
Equally important to the candlestick washout were the sentiment signals. I won’t print all of the charts as its a tedious job – but of note are the VIX – which gave a VERY reliable buy signal as it moved intra-day above 34. Here’s the chart. Note what happens to the market when the VIX moves above 32. Again, this is something I cover in my new course.
Other sentiment indicators that hit my “buy levels” on Monday (see my book Smart Money/Dumb Money) include:
- CBOE Put/Call ratio
- AAII Bears index
- NYSE New High/Low index (of note–it almost went as deep as the day of the COVID crash low)
- Sentimentraders Smart $ Dumb Money spread
Below is a compilation of all of Sentimentrader.com’s sentiment indicators rolled into one single “pessimism” rating. This basically tracks the opinions and activities of retail investors, small traders, small options traders, even your grandmothers opinion – on the market. It rolls them into one rating for how optimistic or pessimistic investors are. As you will note, it is rare to see all of these indicators (represented by the completion in this chart) signal excess pessimism. In fact, the last time we saw a break over the upper pessimism line on this compilation was the bottom of the COVID crash in March 2020. Although we are not witnessing such an extreme here – its clear that investors are pessimistic. The indicator could go a bit deeper, but for all intents and purpose – it is in the buy zone. And that, my friends, is a contrarian buy signal.
I anticipate the market has good potential to rise from here. A reversal and hold over October’s support, a candlestick “hammer”, and deeply pessimistic sentiment indicators suggest that the fruit is ripe for the picking now.
Sure, it would be prudent (as I instruct in my new course) to leg in over a matter of days to confirm the rally. It would be nice to see a move ahead of the 200 day SMA as a second confirmation of a bottom. And its prudent to wait 3 days before getting too excited (which means Thursday). But, for those with a little higher risk tolerance, its not a bad bet to step in with some of your cash a bit early. See if Tuesday remains positive – and dip your toe into the water if it looks to be holding. If you see it sell off during the first few hours, stay out until the market acts positively. But – I have enough evidence in front of me to indicate the odds are good from here. No…You shouldn’t buy all at once, as the market could play tricks. But the evidence is strong enough that an initial deployment of cash into quality stocks makes sense at this point, assuming Tuesday opens and stays positive.