Overbought Daily Levels at S&P 500

The Market is displaying an interesting behavior that we haven't seen in months. In my previous articles I mentioned that there were several repeating behaviors that kept an amazing consistency through 2022. One of those behaviors was that there had only been two rallies since Oct/2021 that had lasted more than four days (black dotted arrows in the screenshot below). We are just going through a third rally that started back on Jul/14 and it still has a chance to continue.

Another consistent behavior that we saw during 2022 is that the 30-day EMA (blue line) was acting as a resistance. Only once during the year the S&P 500 had been able to break and stay above that line, the rest of the times (orange circled areas) there was a pullback.

With the current rally the S&P 500 not only broke past the 30-day EMA, it also reached the +3 Keltner Channel (KC) which signals a short-term overbought condition. The previous two rallies that lasted more than four days (black dotted arrows) had sharp declines after they reached the +3 KC.

The Market is starting to behave differently, what we saw as normal during 2022 is not necessarily going to repeat. I do think that there will be a pullback soon, the closer the index gets to 4,200 the higher the selling pressure it will face. There's a lot of volume around that 4,200 area.

Anything can happen in the Markets, it's important to prepare for any scenario we can face. If there's a pullback risk management will be essential to limit the damage. If the rally continues and is able to close with force above 4,200 it will at least damage the structure of the downtrend (lower highs and lower lows). It's easier to visualize the downtrend in the weekly chart which has the horizontal black lines in order to highlight the important highs and lows of the downtrend.

It's easy to get engaged in the current mood of the Market, when the Bears force a sharp decline panic is the dominating force. Now that the Bulls are displaying some force, traders can become more optimistic and willing to take more risks. An important factor to remember is that the underlying problems that started the Bear Market are still there (inflation and risk of recession, Ukraine War, Supply Chain crisis, increasing tensions between USA and China). We still have a couple of trading days to see if the Bulls are able to keep fueling the rally.