At the lows last Friday, the S&P 500 was just about 8.00% off its mid-October highs without the mercy of any real meaningful bounce on the way down. As such it was just a matter of time until many of the weak hands and sell stops were washed out so that a more sustainable bounce could ensue. Most oscillator indicators, such as the Slow Stochastics indicator on the chart below were in deeply oversold territory as of Friday morning.
At 11:30 AM ET on Friday however things changed for the better (at least for the bulls). Just as European equity markets closed for the week Apple Inc (Nasdaq: AAPL) started to get a bid and a mere 60 minutes later had risen by almost 5.00% off its intraday lows. As we have often witnessed this year, Apple Inc (Nasdaq: AAPL) tends to behave as a leading indicator in the near-term, and as such the broader market too quickly got became better bid for the rest of the day.
After it was all set and done, the S&P 500 ended up closing the day on Friday in the green by 50 bps, after it had been lower by almost 75 bps in the morning session. As a result of this forceful intraday turnaround, many the daily chart of the S&P 500, a good number of its sectors and stocks all around the U.S. stock market had left so called hammer candles on their daily charts. The appearance of a hammer candle at the bottom of a trend and in oversold conditions is a bullish setup for a trade, especially if followed by a strong up-day the following trading session.
S&P 500 sectors such as the materials, technology and energy sectors to name a few all displayed such bullish formations.
The same could be seen on the chart of the Dow Jones Transportation Average (TRAN)…
…and also on individual stocks, such KKR & Co (NYSE: KKR), which in this particular case formed the bullish hammer right at its 200 day simple moving average for a little additional confirmation of support.
All in all the above described hammer formations in the oversold conditions and with today’s follow-through buying should be good for another couple of percentage points of upside on the S&P 500. After that we must re-evaluate, but with any luck the turnaround that began last Friday may have been the beginning of a rally into year-end.