The stock market looks overbought, and this week's stunning rally could soon hit a wall, Fundstrat says

• This week's stunning rally in stocks may soon hit a wall, a Fundstrat analyst said.
• That's because stocks are probably overbought, and the short-term risk/reward for equities is declining.

Markets rocketed upwards this week on the heels of cooling inflation data, but the stunning rally may soon run out of gas.

That's because stocks have seen such sudden tremendous interest that they're probably overbought, a Fundstrat analyst said.

"Short-term overbought conditions as part of a negative momentum trend on weekly and monthly charts suggest rallies into next week would likely arrive at strong resistance," Mark Newton wrote in a note released Thursday. "The short-term risk/reward for US Equities won't be as positive following any further rally into next week."

In the past five days, the S&P has jumped 3% to about 4,500. It's up 17.6% so far this year.

And unlike earlier this year, it's not just the "Magnificent Seven" carrying the rally as the S&P 500 Equal Weight Index is also up 3.73% this week. But the latest upswing may soon hit a ceiling.

"What's abundantly clear when eyeing Equal-weighted Ishares S&P ETF charts on weekly timeframes, is that this bounce is just below an area of very strong resistance, as the breakdown has now rallied back to test this prior area of former support," Newton wrote.

Small caps, financials, homebuilders and transportation stocks could soon reverse course. Meanwhile, tech stocks won't U-turn just quite yet and will rally for longer because of unfading investor interest, Newton explained.

Other technical analysts like Katie Stockton have said the recent breakout in the market increases the chances of the S&P 500 advancing further toward the 4,600 level, where it would face potential resistance.

For his part, Newton said he would "respect a breakout" if and when it occurs, but didn't seem optimistic about it.

"However, given that weekly momentum is negative and $RSP has just returned to test key resistance, the odds favor an initial stall out near the Thanksgiving holiday," he wrote, referring to the Invesco S&P 500 Equal Weight ETF. "We'll see if this happens, or if price action is strong enough to 'break out.'"