S&P 500 Flashes Bearish Signal: Stock Market Drop Possible
A US stock market drop could be on the table if the latest RSI bearish divergence signal plays out. The S&P 500 (which tracks the top 500 US stocks) has made four consecutive higher highs since April 2024 (gray in the chart). Meanwhile, the relative strength index (RSI, gold) has made four consecutive lower highs.
S&P 500 RSI bearish divergence explained
The chart shows the week-to-week price movements of the S&P 500. This cuts out the day-to-day noise to focus on the bigger picture. The RSI tracks the relative strength of buying pressure vs selling pressure over the past 14 weeks.
When the RSI makes lower highs (like now), it means buyers are losing strength against sellers. So even though the S&P 500 is rising (higher highs), selling pressure is building up. While the rally can keep going, its foundation is looking shakier by the week.
For a full understanding of how the RSI works (and the math behind it) download our free RSI guide below:
Zooming in: last week’s S&P 500 bearish engulfing candle
To confirm bearish divergence, you first need to confirm a local high on the investment (S&P 500 here). A bearish engulfing candle is one way to confirm a potential local high – and that’s what happened last week.
Notice in the chart below how last week’s red candle “engulfed” the green candle before it. The red candle traded above the green candle’s high, then closed below its open. The bulls took charge early, but the bears dominated by the close.
Side note: you can learn all about candlestick charts in this guide.
Will the US stock market drop from here?
The S&P 500 rallied 23.8% in 2023 and 24% in 2024 – two great years back to back. At some point, a multi-month stock market drop is bound to happen. While RSI bearish divergence doesn’t guarantee that drop, the technical setup is there.
The ball is in the bears’ court – but they’ll need to convert that pressure into points. Until then, the trend is technically still up.
As usual, none of this is investment advice. If you liked this piece, check out my free newsletter for how-to guides and investment insights across crypto, stocks, metals, and more.
