A shroud of bearish engulfing candles fell over the broad market in Wednesday's session, dampening the holiday spirit and diming the hopes of Dow 20,000 by year's end.
A bearish engulfing candle is characterized by an open near the high of the day and a close near the low, and encompasses the previous day's range. It is usually seen in uptrends and suggests that investors are losing confidence in the direction of the trend.
S&P 500 and Market Indices
The daily candles on the charts of the S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index engulf the previous two weeks of trading, while the Russell 2000 Small-Cap Index, the weakest of the group, only covers the range of the last three sessions.
The reversals have taken all the indices back down to horizontal support levels established earlier in the month. A break below these short-term support levels could see a further decline to the former midyear resistance-turned-support areas.
Facebook and Tech Stocks
The engulfing candles on the Facebook (FB) - Get Report , Netflix (NFLX) - Get Report and Alphabet (GOOGL) - Get Report charts encompassed at least two previous days of trading, while a high wick lower closing candle formed on the Amazon (AMZN) - Get Report chart at the top end of a symmetrical triangle pattern.
The FANG group has not been keeping pace with the recent gains in the broader market, and while that could be a foreshadowing for the broader market in and of itself, further weakness following Wednesday's session could take out key support levels and initiate significant downside action.
The stock opened higher in Wednesday's session, then quickly reversed direction, dropping 6.8% on the day and forming a large-range bearish engulfing candle. The move was more than 4% greater than the 14-day average of overall range and on a surge in negative volume, with the inference being the engulfing candle may mark an important top.
The financials have outperformed the broader market, but they have become overbought and are experiencing a recent decline in positive price momentum. An engulfing candle on the daily chart of Goldman Sachs (GS) - Get Report at the upper end of a small consolidation channel and overbought readings on the relative strength index and the money flow index, a volume-weighted relative strength measure, are particularly problematic.
There is little in the way of technical support after a break below the channel support line until the $112 area and the converging 50-day moving average.
Wednesday's session took much of the holiday cheer out of the market, but it was one just one day's worth of price action and a single bearish candle. The psychological magnetism of round numbers and low-volume holiday volatility makes an upside reversal and a potential bullish engulfing candle not an unlikely possibility going into the close of trading this year.
This article is commentary by an independent contributor. At the time of publication, the author was long RMW and SDS.