The Market failed to continue its advance today as it wilted following the initial opening exuberance. I'm not sure that it means we're heading down from here, but a number of stocks are in the process of forming Dark Cloud Cover candle formations today. The reversal is potentially more meaningful for these particular stocks. However, the fact that yesterday's leaders like Nvidia Corp (Nasdaq: NVDA) are on that list may be a worrying signal for bulls that we may have gotten ahead of ourselves yesterday.

Dark Cloud Cover Basics

(Click on image to enlarge)

Overall Rating: 4 Star

Directional Bias: Bearish Reversal

Number of Candles: 2

Frequency Rating: 3 Star

Pattern Description:

This pattern forms at the end of an uptrend. The formation begins with a tall open candle with the price gapping higher on the next candles open. The second candle is a closed real body with a close that finishes below the midpoint of the previous day’s body.

Volume Description:

Above average volume with increased volume as the price continues lower outperforms.

Statistical Notes:

Patterns where there is a large real body outperform smaller bodies. Formations with a neutral or down trending primary trend outperform.

Measuring Technique:

Measure the height of the formation from low to high over the two candles and subtract it from the closing price of the second candle. 

NVDA Technicals

NVDA found its high on November 22 and has formed a series of lower highs and lows since. The recent downtrend has progressed slowly as the pattern appears to be part of a longer-term consolidation of it's bullish trend. The fact the price held onto it's recent support near $270 and staged such a significant rally off the December 20 low was a strong indication that the price may be staging a breakout from that long-term consolidation.

However, the price today failed to move higher and fell from it's opening gap higher. As the price began to fade intraday, the closing price ended up below the midpoint of the large-bodied candle from yesterday. The indication is that the price is hit an area of resistance which it also tested on December 16. It was on that day that the price also formed a similar candle pattern.

(Click on image to enlarge)

Conclusion

The Dark Cloud Cover candle pattern is an early indication of a change in the short-term trend. On a daily chart, this means that price is confirming resistance. While it may turn around quickly, the potential longer-term bullish breakout has been delayed. However, a bigger correction may be in store if the price breaks its $270 support.