3 Chart Patterns That Suggest Prices Are Headed Lower

Surging stock prices on Monday may have alleviated the anxiety levels of many investors temporarily. However, long-term chart patterns on some of the biggest names in the market are now suggesting that it could be a good time to think more defensively. A significant number of long-term sell signals are starting to pop up across the large-cap segment, which could be a leading indicator that we are in the early days of a major downtrend. In this article, we take a look at several patterns in closer detail and try to determine how active traders will look to protect themselves over the months ahead. (For a quick refresher, check out: 3 ETFs for Trading the Spike in Volatility.)

With businesses spanning healthcare and consumer products, Johnson and Johnson is often used by many fundamental investors as a barometer of the broader financial markets. Taking a look at the chart below, you can see that the price has recently fallen below the combined support of a horizontal trendline and its 200-day moving average. Notice how this level has acted as a key level of resistance in the past. Based on the principles of technical analysis, active traders would expect this type of behavior to continue in the future and will likely protect short positions against a break higher by placing stop-loss orders above $134. Traders will also look to the bearish crossover between the 50-day and 200-day moving averages, shown by the red circle and commonly referred to as the death cross, because it is a common technical signal used to mark the beginning of a long-term downtrend. (For further reading, check out: Support and Resistance Reversals.)

Just like Johnson and Johnson is used as a barometer for consumer products and healthcare, Exxon Mobil is often regarded as the barometer that reflects the state of the energy sector. With a market capitalization of more than $300 billion, there are few companies with the global scale and breadth of operations able to effectively compete. Taking a look at the chart, you can see that the recent onslaught of selling pressure has pushed the price below the support of the 200-day moving average, which has in turn pulled down the 50-day moving average, sparking a death cross signal. This bearish signal suggests that the bears are in control of the momentum, and many traders will likely use the drop below the horizontal trendline as confirmation of a move lower. (For more, see: 6 Forces That May Push the Stock Market Even Lower.)

[Are you interested in learning how to apply support and resistance levels to analyze stock charts? Take a look at Chapter 3 of the Technical Analysis course on the Investopedia Academy]

Another popular large-cap consumer products company that has triggered a long-term sell signal on the chart is Coca-Cola. As you can see below, the price has recently fallen below the combined support of the horizontal trendline and the 200-day moving average. As in the cases mentioned above, the 50-day moving average has dropped below the 200-day moving average, which is likely adding to the downward pressure. Bearish traders will likely watch for a move toward the 2017 low and protect their positions by placing stop-loss orders above $44.53. (For further reading, check out: 7 Market Anomalies Investors Should Know.)

Surging prices on Monday have temporarily taken the attention of some traders away from the deteriorating state of many chart patterns of popular large-cap companies. As we discussed above, an increasing number of long-term sell signals are popping up on the charts of major names, which should be a cause for concern and reason to turn defensive. (For more, see: Volatility's Impact on Market Returns.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not hold a position in any of the companies mentioned.