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Shares of Stellantis (STLA) have been struggling lately and have lost 10.5% over the past week. However, a hammer chart pattern was formed in its last trading session, which could mean that the stock found support with bulls being able to counteract the bears. So, it could witness a trend reversal down the road.
While the formation of a hammer pattern is a technical indication of nearing a bottom with potential exhaustion of selling pressure, rising optimism among Wall Street analysts about the future earnings of this automaker is a solid fundamental factor that enhances the prospects of a trend reversal for the stock.
Understanding Hammer Chart and the Technique to Trade It
This is one of the popular price patterns in candlestick charting. A minor difference between the opening and closing prices forms a small candle body, and a higher difference between the low of the day and the open or close forms a long lower wick (or vertical line). The length of the lower wick being at least twice the length of the real body, the candle resembles a 'hammer.'
In simple terms, during a downtrend, with bears having absolute control, a stock usually opens lower compared to the previous day's close, and again closes lower. On the day the hammer pattern is formed, maintaining the downtrend, the stock makes a new low. However, after eventually finding support at the low of the day, some amount of buying interest emerges, pushing the stock up to close the session near or slightly above its opening price.
When it occurs at the bottom of a downtrend, this pattern signals that the bears might have lost control over the price. And, the success of bulls in stopping the price from falling further indicates a potential trend reversal.
Hammer candles can occur on any timeframe -- such as one-minute, daily, weekly -- and are utilized by both short-term as well as long-term investors.
Like every technical indicator, the hammer chart pattern has its limitations. Particularly, as the strength of a hammer depends on its placement on the chart, it should always be used in conjunction with other bullish indicators.
Here's What Increases the Odds of a Turnaround for STLA
There has been an upward trend in earnings estimate revisions for STLA lately, which can certainly be considered a bullish indicator on the fundamental side. That's because a positive trend in earnings estimate revisions usually translates into price appreciation in the near term.
The consensus EPS estimate for the current year has increased 0.7% over the last 30 days. This means that the Wall Street analysts covering STLA are majorly in agreement about the company's potential to report better earnings than what they predicted earlier.
If this is not enough, you should note that STLA currently has a Zacks Rank #2 (Buy), which means it is in the top 20% of more than the 4,000 stocks that we rank based on trends in earnings estimate revisions and EPS surprises. And stocks carrying a Zacks Rank #1 or 2 usually outperform the market. You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
Moreover, the Zacks Rank has proven to be an excellent timing indicator, helping investors identify precisely when a company's prospects are beginning to improve. So, for the shares of Stellantis, a Zacks Rank of 2 is a more conclusive fundamental indication of a potential turnaround.
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