Some concerning candle patterns for leading technology names have caused me to focus on potential 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 observed bearish candle patterns for key technology names, with Nvidia Corp (NVDA) and other semiconductors featuring the dreaded bearish engulfing pattern.
After an extended bullish run for these stocks, this may indicate at least 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 indicates a potential short-term reversal, with a long up day followed immediately by a long down day.
Why is this pattern so powerful? Because on day two, after opening higher, traders are selling strength to rotate the stock to a short-term distribution phase. And by closing below the open of day one, the price confirms a likely bearish rotation in sentiment. To be clear, this is a short-term pattern, and is really just intended to inform our thinking for the next couple trading sessions.
But I've often found that significant candle patterns happen at market extremes, as the short-term reversal leads to further deterioration as investors get scared away from a potentially broader and more painful downturn. Given the bearish short-term signals from some key leadership names, as well.
