Despite everything, the S&P 500 index keeps climbing up, setting new historical highs. Two main factors are driving this trend: strong Q2 earnings reports from index constituents and a more lenient-than-expected implementation of US administration's tariff policies. The size of imposed duties are quite insignificant compared to Trump's initial proposals. Moreover, they appear to be more declarative, giving market players considerable freedom in interpretation and response. As the saying goes, “the mountain has brought forth a mouse” yet again. One of Warren Buffett's favorite indicators, commonly referred to as “market breadth,” confirms the bull trend's strength: 68% of index components increased during the last trading session.
However, there are nuances.
Looking at the S&P 500 chart, extreme technical overbought conditions on the daily timeframe are immediately seen. This aligns with a consequence of Fitts' Law that suggests the further and/or more precise a movement becomes, the greater the correction needed to sustain it.
The likelihood of an imminent correction is also confirmed by oscillators, in particular the RSI, which has been showing multiple divergences between the price and indicator since early July.
At least four peaks are clearly visible on the S&P 500 daily timeframe, which are not confirmed by the oscillator, meaning that each subsequent peak on the chart is higher than the previous one, while the oscillator shows a decline in peaks.
The overall recommendation is to sell SPX.
Profits should be taken at the level of 6,050. A Stop Loss could be set at 6,500.
The volume of the opened position should be calculated so that the potential loss (protected by a Stop Loss order) does not exceed 1% of your deposit. If your account balance doesn’t allow opening a position of this size, it’s better to avoid entering the market on this signal and wait for other trade options that meet low-risk criteria.
This content is for informational purposes only and is not intended to be investing advice.
