Nikola (NKLA) Forms a “Hammer Chart Pattern”: Time to Bottom Fish?
A downward trend has appeared Nicola (NKLA) recently. While the stock lost 23.1% over the past week, it may see a trend reversal as a hammer chart pattern was formed in the last trading session. This could mean that the bulls were able to counter the bears to help the stock find support.
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 leading zero-emission truck company boosts 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 increases the odds of an NKLA turnaround
There has been an upward trend in earnings estimate revisions for NKLA lately, 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.
The consensus EPS estimate for the current year has risen 8.4% in the past 30 days. This means that Wall Street analysts covering NKLA are largely in agreement about the company’s ability to report better earnings than they previously expected.
If that’s not enough, you should note that NKLA currently has a Zacks Rank of #2 (Buy), which means it’s in the top 20% 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, a Zacks Rank of 2 for Nikola 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 accurately determine when the company’s prospects begin to improve.
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