Wall Street is basking in record highs as the S&P 500 breaks above 6,300 ahead of the July 4 holiday, but just as traders reach for the champagne, a popular market indicator is starting to flash red.
S&P 500’s RSI Enters Overbought Territory: Why It Matters
The S&P 500’s 14-day Relative Strength Index (RSI), a momentum oscillator that measures the speed and magnitude of price movements, surged to 75.62 on Wednesday, well into the overbought zone above 70.
The RSI ranges from 0 to 100, and traders use it to gauge whether an asset is overbought or oversold. While it doesn’t predict direction, history shows it often coincides with key market turning points.
In fact, in several recent cases where the S&P 500's RSI hit similarly overbought levels, the index was soon met with sharp and swift pullbacks.
- July 2024: RSI spiked above 75, and the index dropped 10% from 5,660 to August 6
- July 2023: RSI flagged overbought, and the S&P 500 slid 10% through late October
- September 2020: RSI hit 83 before a rapid 10% decline that same month.
- January 2018: RSI hit climbed to 86 after a 7% rally. The index then plunged 12% in just nine trading days during early February.
Still, the RSI is not a crystal ball.
In December 2023, the indicator was also overbought, but the S&P 500 – as tracked by the Vanguard S&P 500 ETF Trust (NYSE:SPY) – kept climbing and added over 15% until April 2024.
Similarly, in December 2019, a reading of 78 did little to slow momentum until COVID-19, a rather unpredictable event, caused the market to crash two months later.
While the RSI's track record shows that overbought conditions can precede sharp pullbacks, it's not a guaranteed signal -- especially in a market driven by strong momentum, AI optimism, and resilient economic data. Still, with the S&P 500 at record highs and sentiment running hot, traders may want to keep one eye on the technicals as they celebrate the holiday rally.
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