Beware of the Dreaded H Pattern
In the world of investing, patterns and technical analysis often help traders anticipate stock movements. Recently, Crowd Strike and Super Micro Computer (SMCI) have both shown concerning signs of further declines, including the formation of the "dreaded H pattern." This post will break down the technical and fundamental factors influencing these stocks, why investors should be cautious, and how to protect yourself in a volatile market.
Crowd Strike: A Cybersecurity Giant Facing Headwinds
Crowd Strike has been a leading player in the cybersecurity industry, but the stock has seen significant declines following an outage that disrupted major clients like Delta and various software companies and banks. Let’s dive into the factors driving this decline:
- The Technical Breakdown
Crowd Strike was once a $400 stock, but after the outage, it experienced a sharp drop, forming multiple gaps down on the chart. These gaps indicate periods where the stock price opened lower than it closed the previous day, signaling increased selling pressure. While some of these gaps have been filled, others remain unfilled—a bearish sign for the stock.
- The Dreaded H Pattern
The dreaded H pattern occurs when a stock shows a steep decline followed by a weak recovery that forms a sideways movement resembling the letter "H." In Crowd Strike’s case, this pattern suggests that the stock is likely to drop even further. The stock has already been cut in half, and it has broken through key support levels. According to technical analysis, there could be more downside ahead, with a potential target of $170—down from the current price of $240.
- Fundamental Risks
Crowd Strike is facing potential lawsuits from companies affected by its outage, which could weigh on future earnings. Combined with the technical setup, this could signal further volatility for the stock. Investors need to be cautious and prepared for potential losses if the stock continues its downward trend.
SMCI: A Former AI Darling Now in Trouble
SMCI, a key player in the AI infrastructure space, saw massive gains earlier this year. However, recent issues with delayed earnings reporting and negative technical patterns have sparked concern among investors.
- The Technical Perspective: Death Cross and Gaps
SMCI's stock enjoyed an impressive run, nearly quadrupling from its breakout point at $357 to a high of $1,229. However, after reporting delays in their earnings, the stock has been plagued by several gap-downs, showing strong selling pressure. To make matters worse, the stock recently experienced a Death Cross—a bearish signal that occurs when the 50-day moving average falls below the 200-day moving average. This pattern often leads to continued downward momentum, as it indicates that the short-term trend is now weaker than the long-term trend.
- The Dreaded H Pattern Reappears
Similar to Crowd Strike, SMCI is also showing the dreaded H pattern. After hitting its peak, the stock has pulled back significantly, nearing its breakout point of $357. While there’s a chance SMCI may find support at this level, the current downtrend is a cause for concern.
- Fundamental Risks
The uncertainty surrounding SMCI’s earnings reporting has scared off many investors. In the stock market, uncertainty is often worse than bad news because it introduces risk without clarity. Until SMCI addresses these accounting issues, the stock could continue to face pressure.
What Investors Should Do: Avoid the Falling Knife
Both Crowd Strike and SMCI show classic signs of further declines, and while they’ve been strong performers in the past, investors should be cautious. Here are a few key tips to protect your portfolio in volatile times:
- Avoid Trying to Catch a Falling Knife
Investors should resist the temptation to buy stocks in steep decline just because they appear cheap. A stock in freefall can continue to drop lower, and catching the bottom is nearly impossible. Both Crowd Strike and SMCI are in strong downtrends, and it’s better to wait for signs of stabilization before considering a position.
- Look for Better Entry Points
If you believe in the long-term prospects of these companies, it’s wise to wait for technical signs of a reversal. For SMCI, the breakout point at $357 could act as a support level. For Crowd Strike, waiting for clarity on potential lawsuits and a break above resistance levels may offer a safer entry point.
- Preserve Capital First
As the video emphasizes, capital preservation is more important than chasing gains. Every successful trader knows that protecting your downside ensures you live to fight another day. In this case, it means avoiding stocks showing clear bearish patterns until the outlook improves.
- Avoid Writing Covered Calls
While covered calls are a popular income-generating strategy, they require stocks to at least be in a holding pattern or uptrend. Since both Crowd Strike and SMCI are in a downtrend, this is not an ideal time to write covered calls.
FAQs
- What is the dreaded H pattern?
The dreaded H pattern is a bearish technical formation that resembles the letter "H." It occurs when a stock experiences a sharp drop, followed by a weak attempt at recovery, indicating that the downtrend is likely to continue.
- What is a Death Cross, and why is it important?
A Death Cross is a bearish signal in technical analysis, occurring when a stock's 50-day moving average falls below its 200-day moving average. It often signals a shift from a short-term uptrend to a long-term downtrend.
- Should I invest in Crowd Strike or SMCI now?
Both stocks are in downtrends, with bearish technical and fundamental indicators. It’s best to wait for more positive signs before considering an investment.
Call to Action
If you’re looking for more stock market insights and strategies to protect your investments, consider subscribing to our newsletter. Stay informed about the latest market trends and how to navigate volatile stocks.
Conclusion
Crowd Strike and SMCI, once high-flying stocks, are now showing concerning patterns that suggest further declines. As an investor, it’s important to recognize these technical signals and avoid catching a falling knife. By preserving capital and waiting for better entry points, you can protect yourself from unnecessary losses and position yourself for future success in the stock market.
