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S&P 500 Skyrockets, Overbought Signals Spark Investor Concern S&P 500 Skyrockets, Overbought Signals Spark Investor Concern

The S&P 500 soared past the 5000 milestone on Friday, riding high on the hopes of an aggressive Federal Reserve bringing the total number of rate cuts to six by the end of the year.

The Bureau of Labor Statistics reported that the Consumer Price Index for the final quarter of 2023 held steady at 3.3%. Investors are now eagerly awaiting the release of January’s CPI data on Feb. 13, where analysts are banking on a significant deceleration in the yearly headline inflation rate from December’s 3.4% to 3%.

The stock market has been defying gravity since Jan. 19, consistently hitting new all-time highs during almost every trading session. The surge has been fueled by what can only be described as a ‘Magnificent Seven,’ with five mega-cap stocks soaring to unprecedented levels over the past few months.

For traders, the upward ascent may seem inviting, but both the S&P 500 and the SPDR S&P 500 (SPY) have barreled into overbought territory. This signals a looming short-term pullback that prudent investors would be wise to prepare for.

Experienced traders looking to capitalize on the situation have the option of taking a position in one of two Direxion ETFs – the Direxion Daily S&P 500 Bull 3X Shares (SPXL) for bullish plays, or the Direxion Daily S&P 500 Bear 3X Shares (SPXS) for bearish moves.

It’s important to note that leveraged ETFs are designed for trading activity rather than long-term investments.

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The relative strength index (RSI) for the SPY was hovering around 72% on Friday, signifying that the ETF has ventured into overbought territory. Crossing the 70% RSI threshold often acts as a sell signal for short-term technical traders.

  • The SPY has been on a steep upward trajectory since Oct. 27, consistently forming a pattern of higher highs and higher lows on a daily chart. Following the recent higher low at $482.86 on Jan. 31, another higher low is likely in the coming days, as the SPY’s RSI is elevated and signs of dwindling volume signal waning bullish power.
  • If a retracement occurs, bullish traders would ideally want to witness the ETF bouncing off the lower ascending trend line of the rising channel pattern, in which the SPY has been entrenched since Nov. 9.
  • On the other hand, bearish traders would look for a substantial influx of bearish volume to breach the bottom trend line of the rising channel, potentially propelling the SPY into a longer-term retracement. In such a scenario, the 50-day simple moving average is likely to offer at least temporary support.
  • The SPY faces resistance at the pivotal $500 level and at $505, while support lies at $496.05 and $491.42.

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