A few cracks have begun to appear for the S&P 500, according to Robert Colby, Chief Investment Strategist at Robert W. Colby Asset Management.
Colby says the S&P has lost upside momentum since 2 September 2020 and, despite a slightly higher price high last Wednesday (17 March 2021), the RSI and MACD short-term momentum oscillators remained well below previous highs and are now near neutral (see Chart). He stresses momentum is a leading indicator of price, so with momentum weaker than price, as it has been since September, the stock market uptrend has been losing power. In addition, trading volume has been rising as price declines, suggesting selling pressure is overcoming buying power. On-Balance Volume, a leading indicator of price, remained below its February high last week, which is a bearish divergence.
Over the past 3 years, Colby says there have been 3 sizeable downside shakeouts or corrections: 1) -18.84% after the top in January 2018, 2) -20.21% after the top in September 2018, and 3) -35.41% after the top in February 2020. He concludes that, based on typical past cycles of Greed and Fear, a similar downside shakeout or correction could strike at any time.