Monthly Hammer Watch: Historical Echoes and Present-Day Insights

The markets finished the week strong after bouncing off the 100-week SMA. There are three days left in the month, but as it stands, SPY and QQQ are printing massive monthly hammer candles. I went back through history to find similar massive hammer candles and study how they behaved.

As a general rule, when I see a massive candle on the monthly chart, I like to let it retest 38.2% -61.8% before getting long. Sure, sometimes that approach causes me to miss moves, but over time, especially on the monthly timeframe, these candles often retest and consolidate before moving higher.

What Makes This Candle Unique?

Today's monthly candle (still forming) has a much larger lower wick than most examples I found. It's happening near the top of an extended bull market, and the lower wick technically pushed us into a bear market for a day or two.

We’re specifically looking for hammers—or at least hammerish candles—defined as a large lower wick compared to the candle’s body, appearing after a significant bull run and following at least one bearish month.

SPX Monthly Chart

Historical Analogs:

• November 1929 – Two months of bearish price action from highs followed by a massive hammer. Price retested 50% of the hammer candle, rallied for five months, and then collapsed into the Great Depression, falling 83%.

• October 1957 – Two bearish months down before a hammerish candle. Price consolidated inside the candle for five months, retesting the majority of the candle, then broke out to new highs and ran.

• January 1969 – Only one month of selling before a hammer appeared and only after an 11% pullback. Price retested the hammer lows, broke above it, but then sold off ferociously for a year and a half.

• November 1971 and February 1974 – Both saw very similar hammer candles. 1971’s hammer didn’t retest, running straight to new highs. This is the only candle I found that did not retest even a little. The 1974’s hammer broke out and then failed horribly, falling 40% over seven months of pure bear candles.

• October 2000 – A strong hammer appeared after years of bull market optimism. It was quickly taken out the following month, leading into the Dot-Com crash.

• July 2002 – After a deep 50% selloff, a hammer formed. It retested fully (even wicked slightly below the lows) and then launched into a strong bull market that lasted until 2008.

• January 2008 – Formed after a double top (similar to today), with three bearish months including the hammer candle. It never made new highs, breaking down continuously into the 2009 lows.

• August 2011 – A hammer after months of bearishness. It fully retested, even wicking slightly below, but eventually pushed pretty quickly to new highs.

• January 2016 – A hammerish candle several months after Brexit volatility. It fully retested, even wicking below and forming a lower low daily double bottom before rampaging higher.

• February 2022 – A hammerish candle that trapped bulls. It broke down for six more months before finally finding a bottom.

Takeaways:

• Retests of at least 50%-76.4% are very common before continuation.

• It’s also quite common for the following months to wick slightly below the lows of these hammers without actually closing below them, before finding footing and pushing higher.

• Failure of these hammers—with strong closes below them—often leads to large corrections and more drawn-out bear markets. 

There are other examples I found during my study that also correlate fairly well with today’s price action. However, they also showed instances where the candle either retested or broke down, rather than running straight to new highs. Obviously, today’s price action doesn’t have to match any of these historical analogs, but this gives me a framework for what to do now.

I will look to collar positions and protect anything I haven’t already protected into next week. After that, I’ll watch for a retest to add back into the positions where I’ve been taking profits.

The key levels I’ll be watching are:

• $5,300 — the gap from Wednesday, 4/23, and nearly the 50% retrace of the monthly candle.

• $5,200 — the 100-week SMA and the 61.8% retrace of the monthly hammer candle.

If we break below the 4/21 candle, around $5100, I’ll protect my limit buys and assume we are wicking below the hammer and I will look to add at the 2022 highs at $4,800 and the 200-week SMA around $4700. If we get a monthly close below the April 2025 hammer, or a weekly close below the 20-Week SMA I will get pretty cautious, as something more bearish could be underway.

SPX Hourly