When looking for stocks that are good candidates for trend reversal, some candlestick patterns such as a Hammer might help to narrow down the list. One stock that seems to be abating its downtrend and has already started to rally amid a Hammer pattern is Gujarat Gas Limited (NS:).
It is a gas distribution company with a market capitalization of INR 31,325 crore and trades at a TTM P/E ratio of 22.99. The company’s Q1 FY24 results disappointed the street as it reported a 26.6% YoY decline in revenue to INR 3,806.22 crore, while the net income fell 42.4% YoY to INR 215.95 crore in the same period. It has also been seen that FIIs have trimmed down their stake to 4.47% in the June 2023 quarter, from 4.67% in the preceding 3 months.
Image Description: Daily chart of Gujarat Gas
Image Source: Investing.com
However, amid a sharp cut after the earnings announcement, the stock also recovered from the lows on the same day prior to the closing. This combined price action resulted in the formation of a classic hammer pattern on the daily chart, which is a reversal indication and is known to reverse the prior downtrend towards an uptrend.
This hammer candlestick has a high relevance when formed near the bottom end of the chart, and in the case of Gujarat Gas, it took place around 52-week lows. After this pattern, traders should wait for the next session for the stock to take out the high of the hammer which is the final trigger of a long trade.
Today, the stock jumped 2.55% to INR 462, by 2:50 PM IST and sliced through the high of the hammer which should make bears cautious from here. On the upside, there is a gap till INR 469 which should be deemed as the first target level for the up move as the stock is attempting to close the gap. After this, the next level to watch out for is INR 490.
On the lower side, a stop loss can be maintained below the low of the hammer day, at INR 438.6.
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