At 5,578, the S&P 500 is again severely overbought.
“The stock market’s rally to record levels could be in trouble, according to Cantor Fitzgerald. The S&P 500 has closed with an RSI above 81 only 12 other times in the past 40 years, Cantor head of equity derivatives Eric Johnston pointed out. Those instances have historically been followed by sharp declines for the broad market index,” says CNBC.
However, that’s not entirely true.
The last time RSI pushed above 81 was in December 2023. Once that happened, the S&P 500 dropped from about 4,778 to 4,743 before rocketing to about 5,200. Plus, we can’t just rely on a single indicator to make a bearish argument. Instead, you want to confirm what you’re seeing with RSI with other indicators such as MACD and Williams’ %R.
Using all three indicators, we can see multiple occurrences where all three aligned in overbought territory, resulting in a temporary pullback. In fact, if we pull up a two-year chart, we can see that agreement happened about nine times.
The worst of the pullbacks following agreement of the three indicators happened in late July before the S&P 500 fell from about 4,600 to a low of 4,127. Most of the others were temporary pullbacks that didn’t last long. And sure, the latest agreement of the indicators is again pointing to downside again, but we wouldn’t panic.
