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Bearish Patterns Generate Negative Market Sentiment

David Becker
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Bearish Patterns Generate Negative Market Sentiment

Russell 2000 Small Cap Index is in danger of completing a head and shoulders top, which is a reversal pattern that comes after an uptrend. The daily bars show two smaller peaks formed during January and late August. In between those two lower shoulders is a head that is really more of a double top which was formed between March and early July. Now, the Russell 2000 iShares (IWM) are testing a neckline drawn under its February/May lows. A downside violation would complete the topping pattern that has been forming for months. The negative volume pattern confirms that bearish analysis. The volume bars along the bottom of the chart show heavier trading during selloffs and lighter volume on rallies. This week’s downside volume has been particularly heavy.

Another bearish pattern that isn’t in doubt is the potential double top” in midcaps. The S&P 400 Mid Cap Index trading below its August low for most of the day after breaking its 200-day average on Thursday. The two tops were formed in late June and late August. A decisive close below the August low would complete that bearish pattern. A serious break of support by small and midcap stocks would weigh heavily on large caps.

The NYSE Composite Index in danger of falling below its August low as well. The early July, early September peaks also form a potentially bearish double top. A decisive close below the August low would complete that bearish pattern. The NYSE has already lost 5% of its value. A measurement taken from its highs to its August low suggests the potential for another drop of at least 5%, if the August low is decisively broken. The NYSE includes all common stocks traded on the big board which numbers more than 2000.

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