The CNN Fear and Greed index may have pulled back from its December highs, but it is still at extreme greed levels as the US markets register new highs. The Dow Jones Industrial Average, Nasdaq and S&P500 are all trading higher than their December 2019 closing prices, despite the CNN Fear and Greed index now at 90.
As indicated previously in my last article, the period coincides with when there is mass buying participation from retail investors at the time the institutional players have already commenced distribution. Warren Buffett summed this up in his famous quote: “be fearful when others are greedy”.
We may also view the CNN Fear and Greed Index as an oscillator which has a vertical range, with 0 being the most oversold reading and 100 the most overbought. While being overbought is not necessarily an indication to sell, it should provide a heads-up to the discerning investor.
The emerging market currencies are already starting to show signs of rallying against the US Dollar after the US Fed dropped rates three times in 2019. Investment money may start to move elsewhere and it may not be long before the dreaded correction starts to occur.
With the earnings season set to commence this week, the numbers may shine a light in this direction and tell traders when to start getting more fearful.
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Technically speaking, the RSI can be seen to be making another dash to the overbought zone on the long-term monthly chart. Note the presence of the previous divergence (purple lines) and the subsequent price correction from 2951.5 to 2363.0.
Therefore, it would make sense to watch for a failure swing on the RSI as it heads into the overbought region. This would setup the S&P 500 for a corrective move if the price continues to form higher highs.
The S&P 500 is currently trading at 3283.6, and has violated the 3263.3 resistance formed by the 100.0% Fibonacci extension from the swing low of 2009 to the swing high of 2015. This move needs to close above the resistance by a 3% penetration to confirm a breakout. However, if price stalls at this level, I would watch to see if a lower low forms on the RSI in the overbought window to confirm a failure swing. This would setup a correction with the support areas at 2951 and 2706 all up for grabs in the long term.