Key Takeaway
With the S&P 500 at all time highs (despite best efforts from the media), a full market recovery from the lows of the Tariff War are officially behind us. Does this mean that the coast is clear? Well...that's quite frankly never the case. The market always climbs a wall of worry. For now though, let's just simply enjoy!
In the below chart, RSI and MACD are both positively trending. However, there are several signs indicating that this run may take a pause in the not too distant future. First, although it's not uncommon to sharply rise after a major market drop, long term, such a strong upward trend trajectory is not sustainable for long. Secondly, there is a very small negative divergence beginning to form, where RSI is not only overbought, but also beginning to loose some momentum relative to the price action of the index (hence the negative divergence marked by the small solid redlines). No action is necessary quite yet, as the process can take time to manifest, but It's possibly an early warning sign that a minor pull back could be on the horizon. The upcoming pause or pull back could be due to more headline risks (ex: tariffs or geopolitical events), or it could simply be due to seasonality. The S&P 500 tends to struggle during the month of September which is, on average, the worst performing month over the past 20 years, while August is only a little better, and also historically tends to lag other months. [Note: July has been the strongest month!] So upcoming poor seasonality combined with the very beginning of a negative divergence, an overbought RSI reading, and an unsustainable trend trajectory all means we shouldn't be surprised when the market takes a healthy breather or slight pull back in the not too distant future. When such event occurs, we would want to see the area around the most recent high held (red dotted horizontal line marked by thebluearrow).
In the below chart, RSI and MACD are both positively trending. However, there are several signs indicating that this run may take a pause in the not too distant future. First, although it's not uncommon to sharply rise after a major market drop, long term, such a strong upward trend trajectory is not sustainable for long. Secondly, there is a very small negative divergence beginning to form, where RSI is not only overbought, but also beginning to loose some momentum relative to the price action of the index (hence the negative divergence marked by the small solid redlines). No action is necessary quite yet, as the process can take time to manifest, but It's possibly an early warning sign that a minor pull back could be on the horizon. The upcoming pause or pull back could be due to more headline risks (ex: tariffs or geopolitical events), or it could simply be due to seasonality. The S&P 500 tends to struggle during the month of September which is, on average, the worst performing month over the past 20 years, while August is only a little better, and also historically tends to lag other months. [Note: July has been the strongest month!] So upcoming poor seasonality combined with the very beginning of a negative divergence, an overbought RSI reading, and an unsustainable trend trajectory all means we shouldn't be surprised when the market takes a healthy breather or slight pull back in the not too distant future. When such event occurs, we would want to see the area around the most recent high held (red dotted horizontal line marked by thebluearrow).
