Over the past week, the S&P 500 Index (SPX) has displayed a distinct bearish trend, as evidenced by the Big Red Weekly candle. This particular type of technical analysis – examining the pattern formed by the stock’s open, high, low, and close price over the past week – offers traders essential guidance when evaluating price trends and predicting future stock behavior. As the name suggests, a Big Red Weekly candle implies a bearish signal for the stock, generally indicating that the stock may be heading toward a decline.
While the prediction based on this technical analysis may not always be accurate, it is a widely-utilized tool among traders looking to make informed decisions. In the case of SPX, the prominent Big Red Weekly candle hints at the emergence of a possible downtrend in upcoming trading sessions.
The overall bearish sentiment in the market may be tied to several factors. For one, we are in the midst of an earnings season that has the potential to spark heightened volatility. With more than a few marquee names already delivering their Q2 financial results, there is a likelihood that investors’ nervy reactions to the present climate could translate into greater price fluctuations. In this context, market participants must keep a close eye on technical indicators to navigate the complexities of short-term market activity.
In addition to concerns surrounding the SPX, there’s been growing buzz about a possible top in the shares of Apple Inc. (AAPL). Using another form of technical analysis, market observers have been anticipating what’s known as a “double top” pattern in AAPL’s price chart. Basically, the double top pattern represents a bearish reversal, under which the stock’s price will fail to surpass a certain resistance level twice before it eventually enters a period of decline.
If AAPL does indeed validate this double top pattern, it may negatively impact the broader market since Apple carries substantial influence within the S&P 500. Owing to the company’s massive market capitalization – estimated at a whopping $2.5 trillion – a downturn in Apple stock could establish ripples of volatility throughout the index.
In the midst of these bearish signals for the overall market, individual traders have a plethora of opportunities to consider. One such investor, Mike, finds himself firmly invested in three long positions and two short positions.
Mike is long on Chewy Inc. (CHWY), an online retailer for pet products, and Enphase Energy Inc. (ENPH), a solar energy technology company. Taking a closer look at these stocks, CHWY has been riding a wave of bullish sentiment since reporting a stellar Q1 2021 earnings release in June. The pandemic has fueled an uptick in e-commerce purchase trends, and CHWY, as a leading platform for pet supplies, positioned itself to thrive in this climate. It wouldn’t be surprising to see the robust growth trajectory continue for CHWY, bolstering Mike’s bullish position in the stock.
Meanwhile, ENPH is soaring as an industry pioneer for solar technology solutions. Like CHWY, Enphase Energy also revealed strong Q1 earnings, capitalizing on surging demand for sustainable options. With many governments incentivizing green initiatives, ENPH seems set for enduring growth, at least in the near term. As a shareholder, Mike’s long position in ENPH follows the belief that the company’s positive rally will persist in forthcoming trading sessions.
As for Mike’s short positions, he remains bearish on United Airlines Holdings Inc. (UAL) and Etsy Inc. (ETSY). With air travel still facing uncertainties amid varying COVID-19 restrictions worldwide, UAL could well encounter headwinds as it navigates through an unpredictable and highly contingent travel environment. Even as vaccine roll-out programs show promise, it could take time for airline stocks to fully recover from the devastating economic havoc wreaked by the pandemic on the industry. In this sense, Mike’s short position on UAL reflects his expectation that the stock might be in for a continued downtrend.
On the other hand, ETSY has enjoyed significant success throughout the pandemic, as online retail enjoys sustained growth. However, this rapid spurt may also lead to relatively inflated valuations, attracting short sellers who believe the stock’s valuation may be unfounded or unsustainable. Even as Etsy’s Q4 earnings surpassed market expectations, some investors suspect that the platform’s popularity might plateau, and its rapid share price growth will inevitably falter. Accordingly, Mike’s short position in ETSY signals his skepticism surrounding the stock’s ability to maintain its upward momentum.
In summary, Mike and other traders should consider closely monitoring the unfolding price trends in both the overall market and within their portfolios. As price patterns emerge, such as the Big Red Weekly candle in SPX and potential double top for AAPL, investors can strategize their moves around them to capitalize on or mitigate risks in volatile markets. Moreover, those looking to create comprehensive trading plans should stay abreast of macroeconomic developments, sector-specific growth drivers, and stock-specific fundamentals, both in their long and short positions.
