This year has been a good year for stocks, with the S&P 500 gaining 17% year-to-date. The large cap index is showing signs of forming a top, but recent activity could negate a potentially bearish pattern.
The formation in question is a head-and-shoulders top, but that pattern is currently incomplete. The S&P 500 still needs to break below the neckline (blue dotted line) to complete the pattern. As long as the price stays above the neckline, investors can breathe easily.
While the S&P 500 itself isn't in immediate danger, some of its components are on shaky ground. Let's look at three significant names that are forming bearish patterns right now.
Netflix
Netflix (NFLX) dropped sharply on Wednesday, and continued its decline on Thursday. Shares of the streaming video giant have lost 15% of their value since the stock closed at $477 on July 19. That day, Netflix reported earnings after the closing bell, and the stock has struggled ever since.
Wednesday's decline was tied to comments made by Netflix CFO Spencer Neumann at a Bank of America conference. Neumann indicated that strikes by writers and actors would have a negative impact on the company, and effectively guided short-term margins lower.
Technically, Netflix has formed a rounded top pattern (curved line). Just like the head-and-shoulders pattern, the rounded top has a clear level that, if violated, could attract sellers. For Netflix, that level is $395 (blue dotted line). A break below that point could take the stock as low as $325.
UPS
There is a huge rounded top pattern on UPS (UPS) that has been forming for three years. The key support level for this pattern is $155 (blue dotted line). Due to the size of the pattern, the potential downside for UPS is $115.
Beyond the implications for the stock itself, investors should consider what this chart could be saying about the economy as a whole. I'll be keeping an eye on UPS as a possible indicator for economic weakness.
Caterpillar
Investors in Caterpillar (CAT) have been rewarded with a 17.8% year-to-date return. If the stock can maintain its current levels, it will mark the fifth consecutive year of double-digit returns.
Should investors consider taking some shares off the table? Caterpillar has formed a double top pattern. This bearish formation projects a modest decline to the $245 area.
All charts via TradeStation
If you're in Caterpillar for the long run, then no action is needed, but if you have a shorter time horizon, now might be a good time to reduce your position size.
