Stock Market Commentary
Yet another bearish engulfing day. Will THIS one matter to the stock market? In the following video, I review the converging bearish signals just days after all-time highs from the S&P 500 defied October’s warnings. (A summarized transcript follows the video – cleaning and editing help from ChatGPT)
Summarized Transcript
Introduction
Hello everyone, this is Dr. Duru, aka the Market Breadth of Ahan Analytics. Today could be a significant day in the markets. Earlier this month, I wrote that I couldn’t imagine a catalyst that would create a larger drawdown than what we experienced at the beginning of the month. In case you’re interested, I’ve included a link in the captions to an analysis I did on the market’s most dangerous months. October is one of the three most dangerous months, and it seemed like we were going to get through it without much of a drawdown. However, today’s action suggests otherwise. We might even return to the lows of October, but who knows.
Bearish Engulfing Signals
What you’re looking at here is SwingTradeBot. As many of you know, I’m a subscriber and a big fan of this stock-scanning tool. The first thing you’ll notice, if you’ve been following along, is that there are bearish engulfing signals on the S&P 500 and the NASDAQ. This immediately caught my attention. Let’s go over to TradingView to take a closer look at what these signals are telling us.
Here is the bearish engulfing pattern. You can see the red (down) candle that opens above the previous day’s high and closes below the previous day’s low. These types of engulfing patterns matter most at the end of an uptrend, and the S&P 500 has been on a long uptrend. This could be a signal that buyers are finally exhausted. However, this doesn’t guarantee a top—it’s just one signal.
NASDAQ Insights
Looking at the NASDAQ, it’s more telling because there was already a bearish engulfing pattern that marked a hard top earlier in the summer. You can see that the NASDAQ got close to its previous high but fell short before its next bearish engulfing pattern appeared. This is a much bigger red flag that signals a potential double top. We still need confirmation, though. For example, in July, it took three more days before we got confirmation of the signal, so it’s hard to say how long it will take this time.
Market Breadth Indicator
What’s even more concerning to me is my favorite market indicator: market breadth, or the percentage of stocks trading above their 50-day moving averages (I like to call it AT50 for “above the 50”). Since July, the market breadth has been very telling, particularly for the NASDAQ. The S&P 500 has made all-time highs, but the last time the market breadth was in the overbought area marked the top of the NASDAQ. Since then, there have been four instances where this indicator has approached the overbought threshold, only to be rejected. Each of these instances has been bearish, but the bearish momentum hasn’t lasted long.
Now, we have another rejection. This time, combined with the bearish engulfing patterns, it may matter more. Maybe this time we will see a longer-lasting bear signal. Based on my AT50 trading rules, I have no choice but to change my trading call from neutral to cautiously bearish. I’ve included a link in the captions if you want to read up on these trading rules.
Volatility Index (VIX) and Semiconductor Sector
Let’s take a quick look at the VIX (Volatility Index). The VIX has been quite resilient, holding lows around 14.50 since the August calamity. Although the bounces haven’t lasted long, it almost reached the September high. With today’s losses, it seems like it’s getting ready to run up again—another warning sign.
What seems to have driven today’s market action was a domino effect stemming from the semiconductor sector. ASML Holding (ASML), a semiconductor equipment maker, plunged 16% post-earnings. From a technical standpoint, this earnings downdraft confirmed the top that the last earnings report suggested. ASML has been in a bearish pattern since its 50-day moving average breakdown. Today’s drop has further entrenched this bearish trend.
The semiconductor ETF (SMH) fell 5.4%, but it’s still above its 50-day moving average, so there’s still a chance it could hold on and stay bullish. However, the domino effect even hit Nvidia (NVDA), which fell 4.7%. This is crucial because Nvidia was on the verge of invalidating a bearish engulfing pattern from June that has marked a top for the stock ever since. When an important stock like Nvidia takes a hit like this, it’s a significant red flag.
Apple (AAPL) and Market Cap
An important aspect of this is that Nvidia was about to surpass Apple in market cap as the biggest stock on the planet before today’s downdraft. Despite Nvidia’s drop, Apple continued along its merry way and even reached an all-time high at one point. However, with Nvidia’s significant 4.7% decline, it has now lost more ground in the race for the top market cap position.
The China Market Impact
As an aside, I’ve also written about how traders and investors have been excited about the stimulus going into China. I argued that parabolic moves like this one just don’t last. There’s no way to predict exactly when a parabolic move will fall apart, but you know it will. In this case, there was no technical warning when it was going to end. The Chinese government’s back-and-forth with stimulus headlines likely contributed to the volatility.
This is particularly evident in Chinese stocks like Alibaba (BABA). BABA, along with other Chinese large-cap stocks, seems to be following the same pattern. Today’s disappointment in Chinese stocks signals that they may have topped out for now. The FXI, an ETF representing China’s large-cap stocks, and Alibaba both exhibit a similar bearish trend, confirming potential weakness in the broader Chinese market.
Conclusion
In summary, we have several warning signs of tops across the market, particularly in semiconductors and Chinese stocks. I was in the process of identifying stocks that are bottoming, but now, I’ll have to reassess. You can check out my blog for updates on this, and I’ll post a link in the captions.
If you have any questions, feel free to leave a comment. Please subscribe to the channel for more content, and I’ll see you next time. Take care!
Be careful out there!
Active AT50 (MMFI) periods: Day #225 over 20%, Day #124 over 30%, Day #48 over 40%, Day #23 over 50%, Day #3 over 60% (overperiod), Day #63 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long SPY put spread, long QQQ put spread, long BABA calls, long KWEB puts
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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.