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A Candlestick Hammer Arises On BAC

04/12/12 08:40:43 AM
by Koos van der Merwe

A candlestick hammer is a sign of a trend reversal. What's it say about Bank of America?

Security:   BAC
Position:   Accumulate

The hammer is a one-day formation that consists of a small body with little or no upper shadow and a lower shadow that is twice the length of the body. The lowest value is lower than any value over the previous three days. In a downtrend, the formation signals a rally.

FIGURE 1: BAC. Here are hammer and doji formations.
Graphic provided by: AdvancedGET.
In Figure 1, I have highlighted two candlestick formations that look like a hammer, but neither of them meets the true definition of one. Could we therefore assume that the two patterns could act like hammers?

The pattern given when the price reached $7.69 has some of the features of a hammer, but the lower shadow is not twice the length of the body, so even though on the chart I have called it a hammer, it is in fact not one. Yet it did signal a major reversal in the trend.

The price moved up sharply, then formed a doji, corrected down for two days into another doji. A doji is where the open and close of a day's trading session are the same or very close. An upper and lower shadow must exist. A doji signals a trend reversal.

FIGURE 2: BAC. Here are a head & shoulders formation and a flag formation.
Graphic provided by: AdvancedGET.
Figure 2 shows a head & shoulders pattern, giving a target of $10.93. The chart does show that Bank of America (BAC) found strong resistance at the $10.00 level. From there it appears to be falling in a flag pattern. This gives it a target of $12.55 (10.12 - 7.69 = 2.43 + 10.12 = 12.55).

With the relative strength index (RSI) falling below the 52 level, a level that gave a previous buy signal, a move up does appear very likely. The level of $10.00 will act as a resistance, but once broken, the target of $12.55 is very possible.

I would be a buyer of BAC on every correction.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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