shares First Source Builders (BLDR) has been struggling lately and has lost 7.4% over the past two weeks. However, a hammer chart pattern was formed in the last trading session, which could mean that the stock found support with the bulls able to counter the bears. Therefore, a trend reversal could be witnessed on the way.
The formation of a hammer pattern is a technical indicator of an approaching bottom with a possible decline in selling pressure. But that’s not the only factor making a bullish case for the stock. On the fundamental side, strong agreement among Wall Street analysts to raise earnings estimates for this construction supply company enhances the odds of a trend reversal.
Understanding the hammer chart and its trading technique
This is one of the common price patterns in candlestick charts. The small difference between the open and close prices forms a small candle body, and the higher difference between the lowest price of the day and the open or close price forms a long lower wick (or vertical line). The lower wick is at least twice the length of the real body, and the candle resembles a “hammer.”
In simple terms, during a downtrend, with the bears in absolute control, the stock usually opens lower compared to the previous day’s close, and closes lower again. On the day when the hammer pattern is formed, while maintaining the downtrend, the stock records a new low. However, after eventually finding support at the intraday low, some amount of buying interest emerged, pushing the stock higher to close the session near or slightly above the opening price.
When it occurs at the bottom of a downtrend, this pattern indicates that bears may have lost control of the price. The success of the bulls in preventing the price from falling further indicates a possible reversal in the trend.
Hammer candles can occur on any time frame – such as one minute, daily or weekly – and are used by short-term as well as long-term investors.
Like every technical indicator, the hammer chart pattern has its limitations. In particular, since the strength of the hammer depends on its position on the chart, it should always be used in conjunction with other bullish indicators.
Here’s what makes a trend reversal more likely for BLDR
There has been an upward trend in earnings estimate revisions for BLDR recently, which can certainly be viewed as a bullish indicator on the fundamental side. This is because a positive trend in earnings estimate revisions usually translates into higher prices in the near term.
Over the past 30 days, the current year EPS estimate has moved 4.1% higher. What that means is that sell-side analysts covering BLDR are largely in agreement that the company will report better earnings than they previously expected.
If that’s not enough, you should note that BLDR currently holds a Zacks Rank #1 (Strong Buy), meaning it’s in the top 5% of more than 4,000 stocks we rank based on trends in earnings estimate revisions and EPS. Surprises. Stocks with a Zacks Rank #1 or 2 typically outperform the market. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Furthermore, the Zacks Rank #1 for Builders FirstSource is a more conclusive indicator of a potential trend reversal, as the Zacks Rank has proven to be an excellent timing indicator that helps investors pinpoint exactly when a company’s prospects begin to improve.
Want the latest recommendations from Zacks Investment Research? Today, you can download the 7 best stocks for the next 30 days. Click to get this free report
Builders FirstSource, Inc. (BLDR): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research