On May 08, 2012 S&P Index ($SPX) made a hammer, at a short term support zone – April ’12 low of 1357 and March ’12 low of 1340.

Hammer is a bullish reversal pattern that forms after a decline. (see StockCharts). In this case, the decline has been short – only five days since May 01. Hammers signal a bullish reversal as the long lower shadow implies that sellers drove prices down during the session but they finished strong, indicating that the buyers regained control. Hammers do require bullish confirmation – further buying pressure and a close above the high, preferably in higher volume. Such confirmation could come in the form of a gap-up or long white candlestick.

The market has been beholden to the European sovereign debt drama for some time. Today’s news from Europe has been negative and its bourses are lower across the board. This has put pressure on the US futures. Before the open they are trading much lower – (14.0) for S&p futures. So it seems that the gap-up is out of question, now if only the market closes up then we will get the confirmation for the hammer.

For the last couple of days, US markets have either stabilized and have slowly moved up after the European close – see 15 Min chart below. So keep a look out for this phenomenon today too. If there will be a move up then it probably will come after the European close.

Probablity of a confirmation today are low and even if we get a reversal today, it will be a short one as there still are many downward pressures and the correction is not over yet – more on it later.

Update: The European sovereign debt crisis tripped up the market and it continued its downward trend. The bullish hammer pattern requires a confirmation and it never came about.