Well… here we go again.

At the high of the day yesterday, the S&P 500 was back to challenging the resistance line of the rising wedge pattern on the chart. But resistance held. And the S&P gave back most of its gains in the final hour of trading.

Nonetheless, the index did manage to tack on a couple of points. The S&P closed at 2925 – just a fraction below its all-time closing high.

Here’s an updated look at the chart…

Some folks will look at a breakout to new highs – as the index did intraday yesterday – as a bullish development which should lead to even higher prices. But I see this as a potentially dangerous setup.

On Monday, I mentioned that financial stocks could lead the market higher this week. The banking sector was quite oversold and due for a bounce.

Bank stocks have bounced. And that has helped the S&P gain a modest 13 points so far this week.

Now, though, it looks like that bounce has run its course.

Most of the technical indicators (below the chart) are in overbought territory. So, there’s not much fuel available to power the index higher in the short term. And, since the rising wedge pattern has been developing for several months, a breakdown from the wedge could lead to a sharp and immediate decline.

This bearish viewpoint is supported by the chart of the CBOE Put/Call Ratio (CPC) – which closed at 0.80 on Tuesday. Take a look…

The CPC is a short-term, contrary indicator. It compares the action in calls to the action in put options. A reading above 1.20 shows extreme bearishness among speculators and can indicate a good time to buy stocks for the short term. A reading below 0.80 shows extreme bullishness and could indicate a good time to sell.

The last time we got a reading below 0.80 was in mid-August. The S&P 500 sold off 20 points the very next day.

Of course, a 20-point drop is hardly anything to worry about. But we weren’t looking at a bearish rising wedge pattern on the chart back then.

Today, the index looks much more vulnerable to a larger decline.

Best regards and good trading,

Jeff Clark

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