I took a day or two off from discussing the overbought condition but today I am going back to the well. The reason is because I think it's instructive to see what transpired in the market the last several times the Overbought/Oversold Oscillator reached this high.
First, note that despite the market being up and breadth being positive on Thursday and Friday the Oscillator came down; that's the loss of upside momentum in the market. Remember that's what the Oscillator shows us: market momentum.
In the last 10-plus years the Oscillator has been this high only four other times. Interestingly three of those times came in 2009. Last week I noted that the last (and fourth) time we saw the Oscillator this overbought was mid-July 2016. That was three weeks after the Brexit low. As a reminder, we spent the next two weeks chopping about in the market and in late July we had a quick 1-2 day 1% pullback and then we rallied again. But the rally didn't go very far. We rallied for a few days and then chopped for about five more weeks before heading down into the November 2016 low. I would say the theme post that reading was chop for nearly two months.
The year 2009 produced better intermediate-term results but the near-term was often similar. In late March o2009 (point A on the chart) we had what looks minuscule on the chart but was an almost 7% pullback in two trading days! And then we were off to the races again.
In late July of that year we went into a two-week chopfest, had a quick two-day 2% pullback and then we rallied again. That's point B on the chart. Finally, in mid-September we had a more normalized corrective move in that it took two weeks of pullback back (almost 5%!) before rallying again.
If you want to do an apples to apple comparison, then the July 2016 and mid-September 2009 readings both arrived just as we were heading into earnings season. July 2009 was the tail end of earnings season and March 2009 was week prior to it.
I hope you can see why I say, using this metric and the prior instances, I think a pullback won't be severe and why it would lead to another rally over the next few weeks.
There is one other chart I would like to revisit. I showed this chart to you a few days before the low in the market. It is the S&P turned upside down (for the year 2018). At the time I drew in the exact same line and asked, would you rather chase this "breakout" or buy the pullback to the line. My choice was the latter rather than the former. It took longer than I thought it would but that's how the pattern played out. Sometimes it is just better to turn the chart upside down to get a different perspective. The "support" line is not far away (2,620-2,650 on the S&P).