Some questions about candlestick patterns for leading tech names have led me to focus on possible downside targets for the S&P 500. Because if the mega-cap growth stocks start to falter, it could be a dangerous summer for our growth-dominated benchmarks. This week we saw bearish candlestick patterns for major technology names, with Nvidia Corp (NVDA) and other semiconductors showing the dreaded bearish engulfing pattern. After an extended bullish run for these stocks, this could at least signal a meaningful pause in the relentless uptrend. Here we see confirmed bearish engulfing patterns for the VanEck Vectors Semiconductor ETF (SMH), Nvidia and Micron Technology (MU). This two-day pattern signals a potential short-term reversal, with a long day up immediately followed by a long day down. Why is this pattern so powerful? Because on day two, after a higher open, traders sell power to pivot the stock into a short-term distribution phase. And by closing below the day one open, the price confirms a likely bearish rotation in sentiment. To be clear, this is a short-term pattern and is really only intended to inform our thinking for the next few trading sessions. But I’ve often noticed significant candlestick patterns occur at market extremes as the near-term reversal leads to further deterioration as investors become fearful of a potentially broader and more painful downturn. Given the bearish short-term signals from some key leadership names, as well as the overbought conditions for our major benchmarks, I have revisited some downside targets for the S&P 500. Simply put, what should we see in terms of price action to confirm summer market top? In terms of short-term reversal signals, the recent price divergence around the S&P 5,400 is the first line in the sand in my opinion. As long as the S&P remains above this level and also holds a trendline created by lining up the major lows since October 2023, this market is still in a very bullish configuration. But what if the bearish candlestick patterns we’ve been seeing are just the beginning, and we see further weakness in the coming week and beyond? The key level to watch is the S&P 5,200, which would represent a decline of about 5% from the recent market peak. A decline of five percent is actually very common, even in boom years in market history. If the S&P 500 were to break below 5200, it would not only mean that it has failed to close the recent price gap, but that it has also fallen below the 50-day moving average as well as the most recent low of the end. of May. If 5,200 were not to hold, I would consider the “point of no return” to be S&P 4,950. That level is based on the April 2024 price drop, as well as the 200-day moving average. If we were to see enough downside moves that the 200-day mark would not sustain, there would be a strong possibility of a deeper and longer-lasting correction, and investors should strongly consider more defensive positioning. One way I like to visualize this type of framework is to use a “traffic light” technique, based on these key “lines in the sand” for the S&P 500 index. How would I interpret price action around these levels? If we stay above 5200, this market is still in a very strong position despite some short-term price distribution. A move below the S&P 5200 would cause me to re-examine long positions and raise cash due to increased risk of a correction. If and when the S&P falls below 4950, I would be much more defensively positioned, waiting for some signs of accumulation. During a bullish market phase, it can be very comfortable to simply close our eyes and hope for further upside potential. But smart investors know that by clearly defining risk levels, they can best be prepared for what lies ahead. -David Keller, CMT marketmisbehavior.com DISCLOSURE: (None) All opinions expressed by CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or any other medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE SECURITIES OR OTHER FINANCIAL ASSETS. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT THE UNIQUE PERSONAL CIRCUMSTANCES OF ANY INDIVIDUAL. THE ABOVE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
