The S&P 500 is up 85 points since the Volatility Index (VIX) triggered a new buy signal in the final days of June. That’s a 3.1% gain in just seven trading days.

Now, though, the index is creeping into overbought territory.

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That doesn’t necessarily mean that it’s time to sell, or short stocks. Overbought conditions can get more overbought. But the upside appears limited from here.

Buyers should be cautious right here. It’s hard to profit consistently when buying into overbought conditions.

Here’s an updated 60-minute chart of the S&P 500…

This chart has just met the target of an inverted head and shoulders pattern. This is a bullish pattern that often signals the reversal from a bearish trend to a bullish one. The head formed at the 2700 level in late June.

The “neckline” was the resistance line at 2740. So, the distance between the head and the neckline was 40 points.

To get the targeted move, simply add 40 points to the neckline. That gave us an upside target of 2780 – which lined up well with the June high.

As you can see, the S&P 500 hit that target yesterday.

Now, the MACD and RSI technical indicators are in overbought territory. And the 9-period exponential moving average (EMA) – the red line on the chart – is extended far above the 50-period moving average (MA) – the squiggly blue line.

The market is going to have a difficult time rallying much more under these conditions. It seems far more likely that the S&P 500 will either pull back from here and test the former neckline at 2740 as support, or chop back and forth long enough to allow the 50-period moving average to catch up to the current price of the index.

Either way, it’s hard to argue for much more of a rally given the current look of this chart.

Buyers should be careful right here. They’ll likely get a better chance to put new money to work sometime over the next week or two.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Today in the mailbag, an ambitious trader overcomes his fear of options…

Hi Jeff. I have a financial background and understand options, at least in theory. I could never get my wife to allow me to trade options in our portfolio because she didn’t know what they were and I could not adequately explain it, nor did I have the true confidence to make real live trades. We watched a bunch of videos on the net but it just wasn’t clicking for her.

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– Brian

And another reason to be bullish on China in the short term

It is also at a long-term support area from two years ago. Have been buying myself here. Thanks for your updates.

– Bob

Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming right here.