At its peak yesterday, the S&P 500 briefly traded more than one standard deviation above its 50-day moving average before closing slightly below this overbought threshold. Since the S&P 500 peaked in October 2007, prior occurrences where the index has closed at overbought levels have been relatively rare and brief. Following prior instances, the S&P 500 has quickly reversed and headed lower. Overbought levels can be worked off either with sideways trading over time or by falling prices. Therefore, how the market reacts if we hit overbought levels in this rally will help to determine whether or not this is just another bear market rally (lower prices) or something more sustainable (sideways trading).
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