S&P 500 Topping Zones

The S&P 500 Bullish Percent Index ($BPSPX) is signaling a potential S&P 500 (SPX)  topping zone. 

The Bullish Percent Index  is a breadth indicator that shows the percentage of stocks on Point & Figure buy signals. This indicator is good at identifying developing  bearish stock market momentum.  There are usually several bearish divergences before an index makes its ultimate peak.   Using RSI in conjunction with the Bullish Percent Indicator helps to determine stock index peaks. 

The daily $BPSPX chart courtesy of StockCharts.com shows the topping zones identified after the SPX all-time high in January 2022.

First notice the multiple bearish divergence after the SPX August 2022 peak.  This is typical action for $BPSPX as the SPX rallies into a final top.  What happen with $BPSPX at the SPX August 2022 top is not typical.  In August 2022 $BPSPX exceeded its level recorded at the SPX higher peak in January 2022 – a bullish divergence signaling higher SPX prices.  This was a total fake out signal – the SPX declined until mid – October 2022.  No indicator or system works 100% of the time.  Market analysis is about probabilities not certainties.

Using RSI with $BPSPX can identify potential topping zones.  RSI moves above 70% marks the beginning of a topping zone.  After January 2022 there have been eight signals and so far two were ineffective.  The two ineffective signals came at what is usually the beginning of stocks seasonally bullish period.  Statistically November in terms of month end closing is the most bullish month. 

The Daily SPX chart courtesy of Trading view illustrates where the SPX was in relation to the $BPSPX topping zones.

RSI on SPX is used as an additional filter to identify potential tops.  RSI at 63% is used as a boundary to spot false signals.  October and November had SPX – RSI readings below 63%.  The level of 63% is a guideline not a rule.  In general SPX – RSI readings below the upper 60% area in a $BPSPX topping zone could be  false signals.

Also note that none of the SPX short-term tops had RSI bearish divergences.   The SPX – RSI reading on 06/14/23 was 76%.  The RSI reading at the August 2022 peak was 73%.  With the highest  RSI reading since November 2021 its possible an important SPX top was  made on 06/14/23.  However. there was no VIX Topping signal on 06/16/23.   On 06/09/23 the VIX  was 13.50  a new low from its March 2023 peak.  On 06/16/23 the VIX reached a new low at 13.48. 

The most likely short-term scenario would be the SPX declining for a few days then making a new and possible ultimate peak.  The VIX making a higher bottom with an SPX higher peak  could be a confirming signal.

Assuming the SPX did not make its ultimate top on 06/16/23, the range of the longer $BPSPX topping zones is from 8  to 15 trading days.  This range ties in with two potential time cycles turns due  late June 2023.