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Engulfing Pattern Paints Ominous Picture for Large Cap Stocks

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Engulfing Pattern Paints Ominous Picture for Large Cap Stocks

The S&P 500 index experienced an engulfing pattern which is a candle stick pattern that signals a reversal of price action during an uptrend. The engulfing pattern usually is evident as prices make a new high and then close below the prior days low. This change in market sentiment shows that prices were rejected at higher levels and pushed lower trapping those who purchased stock at new-all-time highs.

After notching up an all-time high on Friday the S&P 500 index created an engulfing pattern, which can be viewed in the chart above. The engulfing pattern is similar to the key reversal day in that it shows a quick change of market sentiment.

There are other technicals that when added to the engulfing pattern paints an ominous picture for large cap stocks. The MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal. The RSI (relative strength index) moved lower with price action reflecting accelerating negative momentum while printing near 51, which is in the middle of the neutral range.

The decline in US interest rates before the weekend was more a function of the drop in equity market than the US economic news. It finished last week below its 100-day moving average for the first time since the end of 2012.

The Russell 2000 was one of the biggest losers on Friday dropping nearly 2.5% after the government released its employment report. When small caps stocks lead the market down, the correction could be severe.

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