Inside Markets — Reversal

The SPX is short-term overbought and should make its way to oversold status within two weeks by our estimates.  Overbought and oversold are measurements of both price and time.  Two weeks is a relatively short window, which implies more downside price action.  In terms of price, we expect to reach oversold levels in the 5060-5140 range with the low-end implying ~4% downside from current levels.  Markets can remain overbought/oversold for long stretches of time and resistance/support levels can easily break.  Our confidence in a near-term move to oversold status is based on this week’s loss in relative strength.  Also note that Tuesday’s all-time record high of 5321 was made on weak market breadth and was just ~170bp shy of our bullish upside price objective of 5415. Our confidence in a bullish reversal from 5060-5140 support will depend on the existence of any strong reversal indicator.  The absence of a reversal indicator and subsequent break below ~5000 would open the door to increased bearish momentum to the ~4600 level in our view.  This would imply a peak-to-trough decline of ~14%, which sits right in the middle of ‘correction’ territory.  In our opinion, the correction scenario almost requires 10-year Treasury yields make a new cycle peak above 5%, which seems unlikely