SPX Stochastic and RSI Signals Pointing Toward Pullback or Rally
$S&P 500(.SPX)$ Technical difference between the current potential top, and the top in February 2025 based on the monthly chart:
The red arrows on the chart points out indecision candles that have consistently preceded significant stock market corrections. The first instance marked led to the 2018 bear market, followed by the COVID crash, then the 2022 bear market, and most recently, the 2025 tariff war.
While the chart contains other indecisive candles, those specifically highlighted were followed by declines that pushed the price below the 5-month moving average, as indicated by thin arrows. Simultaneously, as shown by black arrows in the sub-chart, the Stochastic oscillator crossed below the 80 level, suggesting a decline was imminent.
Regarding the Relative Strength Index (RSI), its overbought threshold is 70. A key warning sign, known as divergence, occurs when the RSI sets lower highs while the price itself continues to set higher highs – a condition that typically foreshadows pullbacks as highlighted.
Similarly, bullish reversals are highlighted by green arrows, representing bounces from the 50-month moving average and bullish candles that either bounced from that level or formed a bullish setup, as seen in September 2024. The sub-chart also features an arrow indicating the Stochastic oscillator crossing above 20, which validated the bullish reversal following the 2022 bear market.
The monthly candle in May was bullish and oscillators are not in overbought zone. The likelihood for a major top is low, and the chances for another green candle in June are significant even if there is an intra-month pullback.
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