Dear traders, dear stock market friends.
Over the past seven weeks, we have seen some historic price movements in the S&P 500. The massive slump and explosion of volatility at the beginning of April was followed by a rally that was equally record-breaking and came as a surprise to many investors. In the meantime, the S&P 500 has recaptured all important technical resistance levels and the signals from intermarket analysis also point to a continuation of the bull market in the medium term, although the market is already overbought again in the short term.
Weekly RSI with long-term signal
The extent to which the S&P 500 Index was oversold becomes clear when looking at the weekly RSI, among other things.
Since 2008, there have only been six previous instances in which the Weekly RSI came close to the oversold area (blue horizontal lines). Each of these instances marked a significant long-term turning point and marked the beginning of a longer-term upward movement.
The starting position for a continuation or resumption of the bull market is therefore very good - at least as far as this signal is concerned. However, this does not mean that the path upwards must be without obstacles. Even after the previous signals in the Weekly RSI, there were repeated consolidations and corrections. However, these tended to take place in the short term.
S&P 500 overbought in the short term
After the massive rally since April 7, the S&P 500 is now back in overbought territory. From a risk/reward perspective, waiting for a consolidation or correction would therefore not be a bad idea.
In addition to classic oscillators such as the RSI, stochastics, etc., there is a tool from intermarket analysis whose signals work extremely well. It simply looks at how many shares in the S&P 500 are trading above a certain moving average (SMA). The SMA 20 can be used here for the short-term trend.
The past has shown that if at least 80 % of all stocks in the S&P 500 trade above the SMA 20 (red dashed lines in the chart), there is a high probability that the index will initially take a breather. Currently, as many as 88 % of stocks are trading above the 20-day line.
Market breadth signals strength
Even if the market is overbought in the short term, the current signal situation suggests a continuation of the upward trend in the medium to long term. The S&P 500 Index was able to overcome the important resistance area at 5750 points and also leave all important moving averages behind. Should there be a short-term correction, this would provide strong technical support.
Magnificent 7 shares were one of the main drivers behind the upward trend last year. This year, however, the Mag-7s have been a strong drag on the market due to their relative weakness. It therefore makes sense to pay attention to these heavyweights when analyzing the market as a whole, as they have the potential to lead to a sustained movement in the index.
The following overview shows the charts of the Magnificent 7 shares for the last six months. Amazon, Meta Platforms, Microsoft, Nvidia and Tesla have already broken through important technical resistance levels and formed upward trends. The charts for Apple and Google do not look weak either, but a breakout to the upside and the formation of a new upward trend has not yet taken place here.
In addition to the question of how the leading shares are behaving, it is also important to keep an eye on the market breadth. The aim here is to find out whether the broad mass of all shares can participate in the upward trend or whether the index is only being pushed up by a few heavyweights (Mag-7).
In recent weeks, we have already seen clear bullish signals from the market breadth. On the one hand, the advance-decline line, which very often generates leading signals, signaled a high probability of a breakout in the S&P 500.
In addition, we are now seeing an increasing number of stocks making new 52-week highs and comparatively few stocks making new 52-week lows.
The number of shares in the S&P 500 trading above the SMA 200 has also risen significantly recently. Around 58 % of the index members are now above the 200-day line.
In addition to the classic market breadth indicators, there is another development that is typical of bull markets and thus supports the bull case: Namely, the offensive sector rotation. Investors are currently increasingly buying pro-cyclical stocks again and thus taking risks, while defensive stocks are being sold. Since April 7 (the day the S&P 500 bottomed), offensive sectors such as Technology (XLK), Industrials (XLI), Communications Services (XLC) and Consumer Discretionary (XLY) have risen disproportionately. Defensive sectors such as Health Care (XLV), Consumer Staples (XLP) and Utilities (XLU), on the other hand, brought up the rear.
Author: Tobias Schmid
Date: 19.05.2025
