Don’t Buy the Stock Market Dip. These Charts of Small-Cap and Semiconductor Stocks Explain Why.

Traders work on the floor of the New York Stock Exchange in January 2025. (David Dee Delgado/Getty Images)

Key Points

• The Nasdaq Composite has completed a bearish island reversal with a 2% gap down.
• The iShares Russell 2000 ETF broke below $240, suggesting a potential move to $215 in early 2026.
• The Direxion Daily Semiconductor Bull 3X Shares ETF is 23% below its 52-week high and completed a bearish island reversal.

One week ago I put out a note taking a corrective stance. I still stand firmly behind this. In fact, my conviction is growing.

Last Tuesday the Nasdaq Composite completed a bearish island reversal with a rare gap down of 2%. This came just seven sessions after gapping up by the same amount. The weekly doji candle on the S&P 500 last week still looms large. This candle often appears at inflection points when a prevailing trend is about to reverse.

Investors are now hiding out in defensive areas such as pharma and energy. The VanEck Pharmaceutical exchange-traded fund has added 6% so far this week, though the very round $100 number may keep this at bay like it did in August and September 2024. The VanEck Oil Services ETF has also seen bids. But here too round number theory, in this case $300, may provide a ceiling. After breaking above a bull flag on Tuesday, the oil ETF declined by a combined 4% the next two days—the exact opposite you want to see from a fledgling breakout.

The artificial-intelligence theme has soured, with stocks like CoreWeave down 25% this week. That is on top of a 22% drop the week before. Members of the Magnificent Seven are looking increasingly fragile as well. Microsoft is clinging to the very round $500 number, but support there looks tenuous. That stock can drop to $470 in a hurry. Tesla is sitting at $400, but is looking at back to back 6% weekly losses. The magnet there feels like $360 is coming.

Let us look at three more negative factors that could weigh on markets even more going forward.

The Russell 2000 has its finger on the pulse of the U.S. economy, composed entirely of small-cap companies that are often the engine of job creation. These firms are the economy’s lifeblood, but they are also highly sensitive to interest rates, as many are early-stage, unprofitable, and dependent on external financing.

The daily chart of the iShares Russell 2000 ETF has decisively broken below the bearish head-and-shoulders pivot at $240, opening the door to a potential move toward $215 in early 2026. The ETF now sits about 6% below its recent 52-week high. Its 21-day exponential moving average has turned lower for the first time since April. It has closed beneath that key momentum gauge in six of the last eight sessions. Yesterday’s 2.8% drop, accompanied by heavy volume, marked its second-worst daily decline in six months. The ETF is down roughly 2% so far this week, and on track for its first three-week losing streak in eight months.

The iShares Russell 2000 ETF was trading at around $237 Friday.

All eyes are on the Russell 2000 as this benchmark is often a good indicator of risk-on.

Remember all the talk about narrow market breadth? The poster child for that narrative was the semiconductor group. That leadership theme is unraveling quickly, as shown in the chart of the Direxion Daily Semiconductor Bull 3X Shares ETF . This triple-leveraged vehicle is now 23% below its 52-week high from Oct. 29, a session that produced a doji candle precisely at the round $50 level. Adding to the pessimistic move was the completion of a bearish island reversal. This was formed by the 12% gap down on Nov. 4 following the 9% gap up on Oct. 27. Its 21-day exponential moving average has also rolled over. Taken together, the setup suggests a possible test of the round $30 area before year-end.

Within the ETF, several components look increasingly vulnerable. Broadcom on yesterday fell below its 50-day simple moving average for the first time since April, a meaningful change in character. Nvidia now trades 12% below its recent 52-week high and has consistently failed to gain traction above the very round $200 level. Between Oct. 29 and Nov. 6 it closed at the bottom of its daily ranges, while battling that round number. It then suffered another precise rejection from that level on Nov. 10.

Advanced Micro Devices dropped 9% last week, completing a bearish evening star pattern. Although it entered today outperforming both Broadcom and Nvidia, it is now printing a spinning-top candle, a classic sign of indecision and often an early indicator of buyer fatigue.

The Direxion Daily Semiconductor Bull 3X Shares ETF was trading around $39.50 Friday.

The semis ETF finds itself in a precarious position below its 21 day exponential moving average.

The bottom line: In today’s market, the prudent move is to sell into rallies when the tape gives you the chance.

Doug Busch is the senior technical analyst at Barron’s Investor Circle. His technical view is added to stock picks, including those published exclusively for Investor Circle readers. A glossary of technical terms is updated regularly with new entries.