The case for some pullback as the next move has a few elements. One criterion is technicals on weekly SPY:
RSI 70+ and
Upper BB tag
Arrows on charts below are about where these both occurred; if a cluster of consecutive weeks met conditions, there is still one arrow so this is more visual than quantitative. Just reaching upper band or RSI 70+ alone did not count; both had to happen at the same time.
The most important tops in 2000, 2007, 2011 and 2015 all occurred with RSI well under 70 - divergence being the critical issue. Still, a trend has to slow before reversing and the possibility of a pullback worth hedging is what we are assessing here.
Starting with recent years, the first thing to notice in the chart below is that the weekly RSI was under 70 from 7/2014 all the way to Q1 2017. Just reaching 70 is not of itself negative; stronger markets will reach overbought several times. It is the reaction to the level and potential divergence that matters.
Still, even in a power up period like 2013 (QE!), the combination of upper BB tag and RSI 70+ is where the pullbacks began. In some cases, the market pushed the band for several weeks before dropping. Often any push outside the band was followed by a divergence high inside the band.
2013-current
2008-13
3 of 4 incidences at major trading highs, but a different environment then compared to now.
2003-07
Aside from 2003, the real recovery after recession, RSI had trouble when it reached overbought; a real tell for what was to come. 2006 and 2007 saw pullbacks after RSI 70 and weekly BB tag, though in two of three cases market continued higher to make a divergence high before the drop.
1995-2000
This is probably the most relevant chart considering current market. Obviously I am not bothering with 2000-02.
In 1995, the entire year pushed the upper Bollinger band and RSI overbought! After that, SPY RSI reached 70+ many times and pushed the upper weekly band even more times. Often divergence in both proceeded the pullbacks, though the nicely rising moving average lines snapped back so many times before the market rolled over.
The point here is that a strong market can ignore the weekly band and RSI 70+, and we could certainly experience that here. If higher, then watching for divergence; if lower a real correction would take SPY to weekly 20MA, which has not tagged since 11/2016.
