When stock prices hit pretty speculative valuations a point is reached where prices collapse of their own weight. That point reminds me of Wile Coyote (chasing after the Roadrunner of course) still furiously pumping his legs after running off a cliff into thin air.
Today's reversal from major index highs doesn't mark any kind of 'final' top in my estimation, but does bring home what I've said recently is a warning to unrestrained bullishness. As suggested by how 'extended' this recent run up is without a correction, its overbought extreme in terms of such indicators as the RSI, and the recent extremes in bullish sentiment.
Let me start with a micro view of what the S&P 500 (SPX) daily chart looks like close up to better demonstrate the conditions of a key downside reversal as highlighted on the chart: a new High, especially a decisive new High, followed by a Close that is below the prior (1-2) day's Low(s). The Nasdaq Composite (COMP) didn't close below its prior day's low, only under the prior day's Close. I call this a simple 'downside reversal' rather than a 'key downside reversal'. The first type, as seen in the S&P, is more definitive so to speak.
To zoom out next to a more broad view of the SPX chart, I've highlighted how the S&P 500 has been traveling higher within a relatively narrow uptrend channel since its 1044 February low. Unlike the Nasdaq Composite (COMP), SPX has not made it all the way back to it's previous up trendline, which intersects currently around 1230.
What I mean technically about this index not having had much of a correction in some time is that SPX hasn't even pulled back in the past month (since 2/25) to the low end of its narrow uptrend price channel which currently intersects around 1150.
This type of (rally) extension, when coupled with an overbought RSI extreme AND extremes in my bullish sentiment indicator is asking for trouble if you keep buying into this type rally in terms of adding to buy and hold type call purchases.
As far as indicator type technical reversal warnings, prices went recently to new highs without concomitant new highs in its 13-day Relative Strength Index (RSI) as seen above. Such type bearish divergences can of course go on for some time so is not any kind of precise market timing model. Rather, such divergences suggest a point past which pursuing the rally has increasing risk of a reversal. Shorting such a strong move is a tricky proposition also!
It is the combination of an (1) extended rally AND (2) an RSI extreme AND (3) certain peaks in my sentiment model (CPRATIO), as highlighted by the 3 red down arrows above, that suggests 'high' risk for a downside correction. I particularly have found that in such power moves as seen in the past 4 weeks, it is the SECOND or THIRD daily CPRATIO highs above 1.9-2.0 especially that tends to finally be followed by a correction.
Moving on to a 'macro' or big picture view of SPX seen below on a weekly chart basis, there is quite a different view of what constitutes its uptrend channel. The index could extend its multimonth rally up to the 1300 area before it hit any type of resistance as measured technically. On the downside, the index could pull back to the 1100 area and still be within its broad uptrend channel.
Continuing on to our 'prime' mover in the market where tech is king again, there is something to be pointed out in the Nasdaq Composite's (COMP) mighty return to resistance (first occurring at the 3/10 high) implied by its previously broken up trendline. While COMP has trended up along this line of implied resistance, given the slope of the line the index has of course continued to move higher but it may be tough to maintain levels ABOVE this line; putting COMP in its prior rate of ascent.
Until today's reversal, the first 'touch' to the trendline occurred when COMP hit 2361. The highest subsequent Close above this line was 2415, meaning the index only tacked on another 54 points. It looks like COMP's previous UP trendline may start defining the UPPER end (and resistance) of a broad uptrend channel currently intersecting around 2410 on the upside and 2250 on the downside. This is not a prediction for a COMP pullback to the low end of the channel but it IS where I would anticipate good technical support.
Last but not least, taking a look at the broad uptrend channel on the Weekly COMP chart seen below, there is a lot of 'room' on the upside so to speak, before COMP would hit potential technical resistance. Since there is some likelihood or potential for the Composite to retest prior highs, which extend all the way up to 2800 area, I anticipate a continued move higher over time. Just not all at once!
GOOD TRADING SUCCESS!!