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Sunday, 9 February 2014

Hammer Time

After the hard break down through the weekly middle bollinger band on SPX on Monday, a series of lower downside targets opened up and I spent some time assessing the relative merits of those. However on a weekly candlestick, as with all candlesticks, the most important data points are the open and the close, and last week's candle closed on Friday in the green, and back above the weekly middle band, delivering a very nice looking bullish white hammer candle. All of the action under the weekly middle band was therefore intraweek and on a weekly closing basis the middle band held as support. That bullish candle is a bottoming/reversing candlestick, albeit one that needs confirmation the following week. SPX weekly chart:
So where does that leave the bear case for more downside here? Well in this situation where there is a rare candle there's really no substitute for trawling through past examples, and I have trawled back through the weekly SPX charts for the last forty years to find them.

The way I have defined this candlestick is as a candle where SPX is :
  1. coming off the weekly upper band.
  2. there has not yet been a close significantly below the middle band.
  3. the intraweek pinocchio below the middle band is 25% or more of the distance between the middle and lower band.
  4. opening and closing the week at or above the middle band
I found fifteen previous instances conforming to the description above looking back to the start of 1974, and they are on the charts below as follows. SPX Weekly BBs 2011-Date:
SPX Weekly BBs 2003-4:
SPX Weekly BBs 1996-8:
SPX Weekly BBs 1991-3:
SPX Weekly BBs 1979-83:
Of these fifteen examples I have further divided them by color, white/black (positive close from previous week) or red (negative close from previous week), and candle type, hammer or indecision, and the grouped results are as follows:

  1. Five White Hammers - Returned directly to upper band
  2. One White Indecision - Returned directly to upper band
  3. One Black Hammer - Returned directly to upper band
  4. Three Red Hammers - Two returned directly to upper band, the other bounced halfway back to the upper band before turning back down to break the middle band.
  5. Five Red Indecision - Three returned directly to upper band, the remaining two continued to the lower band. 

The performance of the red negative close candles was random to slightly positive, and the same for the indecision candlesticks, however last week's candlestick was a white hammer candle and the performance for these was extremely bullish as follows:

  1. Of the seven previous examples of these white or black positive close candles all seven returned directly to the weekly upper bollinger band, and further of those seven only one retested the middle band in the following week. 
  2. Of the nine hammer candles eight returned directly to the upper band, with the other bouncing halfway back to the upper band, currently at 1782 (so an equivalent bounce would be to 1830), before turning back down to break the middle band. Of these nine only three retested the middle band in the following week
The message here is unambiguous, in the last forty years on SPX a weekly candlestick of the kind we saw last week was very bullish indeed, and unless something dramatically different happens this time, last week's low was the retracement low, and we should expect to see new highs in the near future. Historically we should not expect to see a further retest of the middle band, currently at 1783, though it is possible that we will. 

This is not a setup to be short and we should all be looking at long entry opportunities next week into the next high. Obviously I still have an open wedge target at 1965, and I'll be considering the odds of making that target next week. 

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