The price trend for
Monolithic Power ( MPWR Quick Quote MPWR - Free Report) has been bearish lately and the stock has lost 9.8% over the past week. However, the formation of a hammer chart pattern in its last trading session indicates that the stock could witness a trend reversal soon, as bulls might have gained significant control over the price to help it find support.
The formation of a hammer pattern is considered a technical indication of nearing a bottom with likely subsiding of selling pressure. But this is not the only factor that makes a bullish case for the stock. On the fundamental side, strong agreement among Wall Street analysts in raising earnings estimates for this chipmaker enhances its prospects of a trend reversal.
Understanding Hammer Chart and the Technique to Trade It
This is one of the popular price patterns in candlestick charting. A minor difference between the opening and closing prices forms a small candle body, and a higher difference between the low of the day and the open or close forms a long lower wick (or vertical line). The length of the lower wick being at least twice the length of the real body, the candle resembles a 'hammer.'
In simple terms, during a downtrend, with bears having absolute control, a stock usually opens lower compared to the previous day's close, and again closes lower. On the day the hammer pattern is formed, maintaining the downtrend, the stock makes a new low. However, after eventually finding support at the low of the day, some amount of buying interest emerges, pushing the stock up to close the session near or slightly above its opening price.
When it occurs at the bottom of a downtrend, this pattern signals that the bears might have lost control over the price. And, the success of bulls in stopping the price from falling further indicates a potential trend reversal.
Hammer candles can occur on any timeframe -- such as one-minute, daily, weekly -- and are utilized by both short-term as well as long-term investors.
Like every technical indicator, the hammer chart pattern has its limitations. Particularly, as the strength of a hammer depends on its placement on the chart, it should always be used in conjunction with other bullish indicators.
Here's What Increases the Odds of a Turnaround for MPWR
There has been an upward trend in earnings estimate revisions for MPWR lately, which can certainly be considered a bullish indicator on the fundamental side. That's because a positive trend in earnings estimate revisions usually translates into price appreciation in the near term.
The consensus EPS estimate for the current year has increased 23.5% over the last 30 days. This means that the Wall Street analysts covering MPWR are majorly in agreement about the company's potential to report better earnings than what they predicted earlier.
If this is not enough, you should note that MPWR currently has a Zacks Rank #1 (Strong Buy), which means it is in the top 5% of more than the 4,000 stocks that we rank based on trends in earnings estimate revisions and EPS surprises. And stocks carrying a Zacks Rank #1 or 2 usually outperform the market. You can see
the complete list of today's Zacks Rank #1 (Strong Buy) stocks here >>>>
Moreover, a Zacks Rank of 1 for Monolithic 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 a company's prospects are beginning to improve.