S&P 500 Stretched, But Time And Price Wearing Bears Down

technical analysis eyeIt was 12 sessions ago that the S&P 500 broke out above 1900. And considering that the index closed today at 1943 (or just 2.3% above the breakout), many may be inclined to refer to the past few weeks as a cruel game of “wear the bears out.”  Look no further than the multitude of hollow candlesticks post-breakout to feel the bears pain on a time continuum… like little paper cuts with each move higher. That said, the steady buying also assisted in driving the Relative Strength Indicator (RSI) to a +73 reading earlier this week, hinting that a pullback was in the offing.

Earlier this week, fellow SIM contributor Andrew Kassen wrote a research note on the overheated RSI reading on the June S&P 500 E-mini Futures Contract (ES). He added some color and caution to trading solely based on RSI:

This “overbought” reading (defined as anything >70) is commonly regarded as sign of an imminent bearish reversal: something a glance at ES affirms with few exceptions.  But, anyone who has attempted to use RSI to time entries and exits knows it can be dangerous to do so without other corroborating technical factors and some well-defined risk parameters.

It’s no secret that equities are in uncharted territory and stretched on a time and price basis, but this can go on for longer than one thinks. So what should investors do if they are cautious about equities here?  If long, tighten stops. If short, tread lightly and be patient. Sounds simple, but as traders know, successful navigation is rooted in your psychology and born out in your execution.

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The real battleground areas will be 1900 (+/- 10 pts) and 1955. Below is a chart highlighting the price action. I’m a bit bias towards a “retest” happening sooner than later, but note that 1980 is still looming overhead, with 2032 as a stretch level.

S&P 500 Daily Chart

S&P 500 chart analysis June 11 2014

Thanks for reading. Trade safe, trade disciplined.

Author has a short position in the S&P 500 at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.