Chart Advisor: Bearish Engulfing – Stocks fail to find a floor as the S&P 500 closes at a new year-to-date low.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 27th September, 2022

1/ Bearish Engulfing Action

2/ No Confirmation From Banks

3/ Bear Market Leadership

4/ Gold Signals More Losses

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Bearish Engulfing Action

A number of bearish engulfing candlesticks were formed today as sellers came out and stifled this morning’s rally. This type of formation occurs when an intraday advance fails and closes beneath the previous day’s closing lows. With a wider opening and closing trading range than the last session, price is said to “engulf” its previous moves.

This is a classic bearish candlestick formation, which typically forebodes further selling pressure to come. Here’s how it appears using the SPDR Industrial Sector ETF (XLI) as an example:

Source: All Star Charts, with data provided by Optuma

As you can see, this bearish engulfing pattern is taking place at a critical support level. XLI rolled over and made new lows today after retesting its June and July pivot lows from below.

Any potential follow-through could confirm this bullish formation and signal further downside for XLI. With similar patterns appearing all throughout the equity markets today, tomorrow’s price action could provide supporting information.

2/ No Confirmation From Banks

Zooming out on our charts, we can point to plenty of long-term levels that remain intact. From a structural standpoint, few levels are more important than the highs from previous cycles.

The chart below shows the Large-Cap Financial Sector SPDR (XLF) rebounding off a shelf of former resistance-turned-support (blue line).

Source: All Star Charts, with data provided by Optuma

This polarity zone represents a major confluence of interest, as prices peaked here back in 2007, 2018, and 2020. As long as financials are above this level, support remains intact.

However, when we look at an index of the six-largest U.S. banking stocks, we’re seeing a slightly different story. Some of the largest and most important stocks in the financial sector never reclaimed their pre-financial crisis highs. Bulls want to see these stocks catch higher and confirm the price action in XLF. Until they do, the short-term trend could remain uncertain.

3/ Bear Market Leadership

Defensive sectors have been showing relative strength all year. This is especially true for consumer staples, utilities, and low-volatility stocks.

The chart below shows the SPDR Consumer Staples Sector ETF (XLP) on the verge of resolving lower from a bearish reversal pattern on an absolute basis. It is also threatening to resolve higher from a bullish reversal pattern relative to the broader market.

Source: All Star Charts, with data provided by Optuma

During the depths of a bear market, leadership can mean nothing more than simply going down by less. The fact that even the strongest groups are completing tops and rolling over suggests there are no places to hide in the equity market right now.

4/ Gold Signals More Losses

The secular bull market in gold is on hold as the precious metal breaks to fresh two-year lows. Gold futures have been flirting with the lower bounds of a multi-year range for the better part of September.

Last week, multi-year support gave way as bears took control, sending prices lower.

Source: All Star Charts, with data provided by Optuma

Based on gold’s stature as a leading indicator of inflation, the breakdown in gold does not bode well for other commodities and cyclical assets.

Downside follow-through in the shiny yellow metal could imply a deeper correction for the entire commodity sector.

Originally posted 27th September, 2022

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