Overbought
May 6, 2025
The SPX has reached short-term overbought levels after a +12% rally from the April 8 low. While the index was able to clear the upper end of our 5396-5650 resistance zone on Friday, it was unable to maintain that level yesterday. As we noted yesterday, we also moved the technical goal post out to the 5750-5785 range to include the late-March rebound high, 200-day moving average and a 3% error band around the 52-week VWAP for the SPY (SPX ETF). It makes sense to wait for confirmation given that sharp spikes in implied equity volatility (VIX) have historically triggered bear market reflex rallies in the 4-12% range.
The sequencing of near-term macro data could become tricky if upside price adjustments occur before the growth data weakens. This could put the Fed in a difficult position as it waits and risks “falling behind the curve”. In this more bearish scenario, the administration’s criticism of Powell could become louder with unintentional consequences for bond yields and the dollar.
Our sense is that U.S. equities will trade in a choppy wide range between ~5000-5600 over the next several weeks as the SPX burns off overbought conditions in search of a bottom. We expect the ultimate low will be in that range with trend deceleration and bullish momentum divergence preceding a reversal.
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