Shares of sempra (SRE) have been struggling lately and are down 8.5% over the past week. However, a hammer chart pattern formed in its last trading session, which could mean the stock has found support, with the bulls able to counter the bears. Thus, he could witness a trend reversal down the road.
The formation of a hammer pattern is seen as a technical indication that a bottom is approaching with a likely drop in selling pressure. But that’s not the only factor that makes a bullish case for the stock. On a fundamental level, the strong agreement of Wall Street analysts to raise the earnings estimates of this natural gas and electricity supplier reinforces its prospects for a trend reversal.
Understanding the Hammer Chart and the Technique to Trade It
It is one of the most popular price patterns in candlestick charts. A minor difference between the open and close prices forms a small candle body, and a larger difference between the daily low and the open or close forms a long lower wick (or vertical line). Since the length of the lower wick is at least twice the length of the real body, the candle resembles a “hammer”.
Simply put, during a downtrend, with absolute control of the bears, a security typically opens lower than the previous day’s close, and closes lower again. On the day the hammer pattern forms, maintaining the downtrend, the stock hits a new low. However, after finally finding support at the day’s low, some buying interest is emerging, pushing the stock higher to close the session near or slightly above its open price.
When occurring at the bottom of a downtrend, this pattern signals that the bears may have lost control of the price. And, the success of the bulls in preventing the price from falling further indicates a potential trend reversal.
Hammer candles can occur at any time – such as a minute, daily, weekly – and are used by both short-term and long-term investors.
Like any technical indicator, the hammer chart pattern has its limitations. In particular, since the strength of a hammer depends on its location on the chart, it should always be used in conjunction with other bullish indicators.
Here’s what increases the odds of a turnaround for SRE
There has been an upward trend in earnings estimate revisions for the SRE lately, which can certainly be seen as a bullish indicator on the fundamental side. This is because a positive trend in earnings estimate revisions generally translates into short-term price appreciation.
The current-year EPS consensus estimate rose 0.2% over the past 30 days. This means Wall Street analysts covering SRE overwhelmingly agree on the company’s potential to report better earnings than they previously predicted.
If that’s not enough, you should note that SRE currently has a Zacks Rank #2 (Buy), meaning it’s in the top 20% of over 4,000 stocks we rank based on review trends. earnings estimates and EPS surprises. . And stocks with a Zacks rank of No. 1 or 2 generally outperform the market. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Additionally, a Zacks Rank of 2 for Sempra is a more conclusive indication of a potential trend reversal, as the Zacks Rank has proven to be an excellent timing indicator that helps investors identify precisely when the outlook for a business begin to improve.
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