S&P 500 Levels to Watch if Troubling Chart Patterns in Nvidia and Other Tech Mean a Near Sell-off

Recent concerning candle patterns in leading technology stocks have prompted me to consider potential downside targets for the S&P 500. If the mega-cap growth stocks begin to decline, it could spell trouble for our growth-dominated benchmarks this summer.

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This week, we observed bearish candle patterns in key technology names, including Nvidia Corp (NVDA) and other semiconductor stocks, which featured the bearish engulfing pattern. After an extended bullish run, this pattern suggests at least a meaningful pause in the uptrend.

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We see confirmed bearish engulfing patterns for the VanEck Vectors Semiconductor ETF (SMH), Nvidia, and Micron Technology (MU). This two-day pattern indicates a potential short-term reversal, with a long up day followed by a long down day. The power of this pattern lies in its signal that traders are selling strength on the second day, moving the stock into a short-term distribution phase. Closing below the open of the first day confirms a likely bearish shift in sentiment.

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To clarify, this is a short-term pattern intended to inform our thinking for the next couple of trading sessions. However, significant candle patterns often occur at market extremes, leading to further deterioration as investors shy away from a potentially broader downturn.

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Given these bearish short-term signals from key leadership names and the overbought conditions of our major benchmarks, I revisited downside targets for the S&P 500. The goal is to identify what price action would confirm a summer market top.

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The recent price gap around S&P 5,400 is the first "line in the sand" in my view. As long as the S&P remains above this level and holds a trendline created by connecting the major lows since October 2023, the market remains in a bullish configuration. But if the bearish candle patterns are just the beginning and we see further weakness, what levels should we watch?

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The most critical level is S&P 5,200, representing about a 5% pullback from the recent market peak. Five percent pullbacks are common, even in strong bull markets. If the S&P 500 falls below 5,200, it would not only breach the recent price gap but also drop below the 50-day moving average and the most recent major low from the end of May.

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If 5,200 fails to hold, the "point of no return" would be S&P 4,950. This level is based on the April 2024 price low and the 200-day moving average. A drop below the 200-day moving average would likely signal a deeper, more protracted correction, prompting investors to consider more defensive positioning.

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To visualize this framework, I use a "stoplight" technique based on these key levels for the S&P 500 index.

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Here's how I would interpret price action around these levels: Staying above 5,200 indicates the market is still strong despite any short-term price distribution. A move below 5,200 would prompt me to reassess long positions and raise cash due to an elevated risk of a correction. If the S&P drops below 4,950, I would adopt a more defensive stance, waiting for signs of accumulation.

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In a bullish market phase, it's easy to hope for further upside, but savvy investors know that clearly defining levels of risk prepares them best for whatever lies ahead.

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