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Price Charts: Bull Hammer

March 22, 2005

The Japanese developed a technical analysis set of tools called "Candlesticks" which goes far beyond the simple depiction of a chart as a white bar for a rising day (or week), and a colored red or black bar for a declining day (or week). The method contains an entire catalog of recognized patterns. The Bible written on the method is by Steve Nison, Japanese Candlestick Charting Techniques. It was published by the New York Institute of Finance in 1991. Its tagline says

"candles exhaust themselves to give light to men"

For an online learning website, check Altavest for a nice introduction and survey. It starts at the beginning and explains a great many important patterns.

A rich and colorful array of names for designated patterns accompanies this school of analysis, which has been heartily accepted outside Japan. Professional traders honor the method, use its tools, identify its patterns, and often profit handsomely. We have engulfing patterns, doji tops, gravestone dojis, stars, hanging man, closed windows, dark cloud cover, tower tops, three advancing soldiers, and much more. An easily recognized and highly reliable pattern employed occasionally in my work is the hammer. Its bullish version screamed out after the energy sector rotation took down on a temporary basis a favorite energy stock of mine. The signature traits to the bull hammer are for an intraday decline to be reversed, for the daily high to exceed the open, and for the majority of price action to occur below the open and close. It is essentially a breakdown and selling climax, fully recovered then rescued. The figure in the chart resembles a mallet hammer, with big rubber faces, used for shaping metal and soft faces, or for restructuring kneecaps. Notice the "bearish engulfing" pattern vividly unfolded on March 10-th, like right out of a textbook. It led to a climax, and now comes the strong recovery.

The company fundamentals are stellar, almost surely to realize very significant Q3 and Q4 earnings from both discoveries and capital investments. Its identity is for you to find out, if you subscribe, or if your detective skills are so advanced as to point toward a career change à la Sherlock Holmes. The daily chart above displays a textbook bull hammer. The reversal was honored, with some follow through. The recovery will attain new highs this summer in my view.

The debate is ongoing and unresolved as to why patterns are exhibited, what actions produce them, what trader psychology is manifested. Many technicians actually do not care to explain, since a pattern is the fact unto itself, fully integrating the information. They believe pricing integration of data is in advance and thus contains better tradable information than fundamentals for a company. The debate will rage without resolution. My tactical approach is to use all tools. While a full treatment is not possible, some thoughts can easily be provided. First some specific points with the energy stock ComeFindOut (CFO), then other general points on the pattern. Don't check "CFO" since it is not a valid ticker symbol, nor does its stand for Chief Financial Officer. Oy. Sign up to the Hat Trick Letter and find its identity. CFO is likely to surpass $10 per share by summer, and approach $20 by year end, but of course, no promises, only indications.

Reversals are difficult to explain. Even onto stellar companies, some rain must fall. This CFO share price has had a tremendous runup on discoveries of oil this past summer, along with the gradual establishment of its business structure. Its value is being recognized, confirmed by increase in trading volume. They have multiple drill locations, with varying working interest. They have almost completed a pipeline to service at least three production locations. They have a share in a processing plant. They carry no debt. Their recent capex line item is significant, a great investment in their business. Soon, costs will drop from internal investment, and profits will soar. Per barrel income on produced oil will rise as the pipeline kicks in and trucking costs kick out, a win-win. Six of eight cylinders are firing, with two more hitting soon. A peak in the energy sector was due to occur. As superstar Greg Weldon put it in a rare CNBC interview, expect some rotation out of energy, but look also for a quick return to it, since its bull market will be with us for a long time. My view is that the energy bull market will be with us until China goes quiet, goes dark, or is firmly planted on an asteroid. Selloffs in energy will be brief. So too was it with CFO.

Volatility owes to the low institutional ownership in CFO, which likely has begun to change in the last two weeks. Rebound in rescue has come with very large volume. More stability will be forthcoming in the next few months. Support was found. The patient watchers had their chance to pounce as retail investors who bought recently at higher levels bailed out. They bought the short-term top, late to the party, only later to sell on a panic. Bull hammers sometimes have their basis in panic selling in climax. The bandwagon unloads weak smaller hands, only to take on strong larger hands in a loud but orderly transition. The patient waited for their own signals that the worst of the selling had come to an end. A new longer lasting party has been hereby announced which will last through 2005 and into next year. Institutions such as commodity funds, sector mutual funds, and others require large volumes to satisfy their orders. They want nothing to do with smallfries which cannot accommodate their large transaction flows and whose advance will not move the needle on their fund performance. The bull hammer is not based upon short covering, but rather more likely an end to a brief selling shakeout phase, combined with recognition of deep value.In this case, margin selling by retail investors came to a climax in my view. Eventually, over the course of hours, the buying regained momentum. A pause for a while at a given elevated price off the bottom (and not yet another decline) encouraged others to enter with buy orders. A lower sought price did not avail itself, and in came purchases. In the immediate, sellers became exhausted even as control is taken by buyers. Stronger hands lead to a new base, which is in the process of forming.

Oftentimes, a pattern leads to a forecast which is tradable. We seek confirmation. One can find it with the crude oil price in a broad sense. The pattern there is the bullish Head & Shoulders. My March HTL issue of 3/14/2005 pointed to a potential breakout in the crude oil price whose target is $70 per barrel in price. Below is its chart, one week old. The Chicago pit players talked on CNBC last week about a technical target of 70 by summer. So the jackass can read charts too. The span of the H&S is from 40 to 55, a full 15 points of potential swing to 70. Even OPEC ministers grudgingly admitted to $80 being within the realm of possibility.

The entire energy sector would surely benefit from an evolving situation founded in rising world demand and pressured supply. It is reported that Chinese energy import demand in 2005 will be over 30% greater than in 2004. Worth repeating, we need a near perfect world on the supply side to keep crude oil shipments and flow stable and steady. That means no bandit sabotage in Nigeria, no worker strikes in Norway, no pipeline explosions in Iraq, no structural damage to oil fields in Saudi Arabia, no retaliation by Chavez in Venezuela, no disruption to Western partner ventures and no legal interruptions in Russia. One could go on, like no hurricanes in the Gulf of Mexico, no severe lowered estimates of Caspian sea deposits, no oil spills in Alaskan waterways. A sharply rising oil price comes from ANY SINGLE SNAFU. A stable oil price comes from NO PROBLEMS ANYWHERE. My money is on disruptive problems, since bandits, labor, insurgency, depletion, politics, and legal warfare are simply too much an integral part of the human psyche. And we have not even addressed the challenges from a shortage in both oil tankers and refineries !!!

An old adage in technical trading calls for examination of the chart with a longer time unit in order to confirm a hypothesis. The weekly chart tells a similar story and issues a similar signal to the daily chart in the case of the ComeFindOut (CFO) stock. Yet another bull hammer is in clear display. Support at 6.50 was honored on a weekly basis. The recently established high is to be tested, then surpassed easily in the summer and autumn months. The rise will come off the new higher base.

More market psychology is at work in the technical battleground. Its 50-day moving average was violated (not shown here) in the course of the midweek activity. Traders rescued the stock price so that damage to the 50dMA might not be extensive. In addition, traders responded to the exhibited trendline. For a firm emerging onto the scene as a midsized energy player, the uptrend will usually remain in force. CFO has shown a pattern. It has responded well to its 50dMA. It has responded well to its uptrend. When it takes some giant steps upward, it tends to reach a level 50% above its current 50-day moving average. Such characteristics are an investor's dream and a trader's promised land.

 

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

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