MW Stocks were flashing this warning signal before tariff jitters drove Dow down 500 points

By Joy Wiltermuth

Stocks were falling sharply on Monday, with investors taking some chips off the table as President Donald Trump's latest tariff announcement rattled Wall Street.

But while the S&P 500 index SPX and Nasdaq Composite Index COMP both pushed deeper into record territory ahead of the July 4 holiday, a closely followed stock-market signal already was flashing a potential warning sign.

In seven out of the past eight sessions, the S&P 500 pushed above its upper "Bollinger Band," a short-term technical signal that can help traders gauge when stock prices look overbought or oversold.

This chart shows the S&P 500 poking through that upper band, an indicator that tends to attract attention and can lead to profit-taking, according to Jason Goepfert, a senior research analyst at SentimenTrader.

It has been "getting some attention now because the world's most benchmarked equity index has poked above its upper" Bollinger Band "almost every day for over a week, all while trading at record highs," Goepfert wrote in a Monday client note. "This is either a sign of remarkable momentum or 'too much, too fast.'"

John Bollinger, a financial analyst and commentator, created the visual tool in the 1980s to help traders determine whether stocks look poised to rise or fall, based on their 20-day moving average, plus two other bands set a few standard deviations above or below that average.

A move above the upper band can signal overbought conditions, while a move below the lower band can point to stocks being oversold.

When the S&P 500 previously was at multiyear highs and set off the same signal, it showed a loss over the following week every time since 1997, according to Goepfert.

"Within the following six months, it gained more than 5% ten times, and lost more than -5% ten times as well, so a really mixed picture," he wrote. "Only two signals (1966, 2000) preceded bear markets within the following year, and six preceded declines of -10% or more."

The Dow Jones Industrial Average DJIA had been close to reclaiming record territory before it tumbled on Monday. At last check, it was down about 527 points, or 1.2%, while the S&P 500 was off 1% and the Nasdaq was 1% lower, according to FactSet.

Trump's social-media account posted letters addressed to Japan and South Korea, which indicated the two countries would face a 25% tariff rate starting Aug. 1. The focus has been on whether Trump will offer an extension of his earlier July 9 deadline for deals to be made before "reciprocal" tariffs will be applied.

Investors had been counting on tariffs to find a floor below the "reciprocal" levels outlined by Trump in early April, which shocked Wall Street and ignited fears that the U.S. economy could tip into a recession.

While Goepfert didn't wade into tariffs, his analysis showed that past "persistent bouts of momentum" in the S&P 500 can favor the Nasdaq composite and Russell 2000 index RUT of small-cap stocks.

"Two months later, the Russell 2000 showed a median return of +4.8%, compared to -0.7% for the S&P 500," he wrote. "Five months later, the Nasdaq composite enjoyed a positive return 80% of the time, compared to 68% for the S&P."

-Joy Wiltermuth

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July 07, 2025 13:56 ET (17:56 GMT)

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