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A downtrend has been apparent in Tetra Tech (TTEK) lately. While the stock has lost 5.6% over the past week, it could witness a trend reversal as a hammer chart pattern was formed in its last trading session. This could mean that the bulls have been able to counteract the bears to help the stock find support.
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 consulting and engineering services company is a solid fundamental factor that enhances the prospects of a trend reversal for the stock.
What is a Hammer Chart and How 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 Makes the Trend Reversal More Likely for TTEK
An upward trend in earnings estimate revisions that TTEK has been witnessing lately can certainly be considered a bullish indicator on the fundamental side. That's because empirical research shows that trends in earnings estimate revisions are strongly correlated with near-term stock price movements.
Over the last 30 days, the consensus EPS estimate for the current year has increased 3.3%. What it means is that the sell-side analysts covering TTEK are majorly in agreement that the company will report better earnings than they predicted earlier.
If this is not enough, you should note that TTEK 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 Tetra, a Zacks Rank of 2 is a more conclusive fundamental indication of a potential turnaround.
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Tetra Tech, Inc. (TTEK) : Free Stock Analysis Report
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