I will be back later tonight with a video recap. For now, consider the weekly RSI divergence which is at least slowing things down considerably in the tape this week.
I talked about it over the weekend in the Weekly Strategy Session. Here is the first main excerpt:
A. CURRENT MARKET POSTURE
1. New Highs on the Indices, But Not as Impressive as Earlier in the Year
Picking up right where we left off last weekend, in gauging the sustainability of the V-shaped rally in the major averages off the June 24th correction lows, the idea was to observe not only the way in which the broad market consolidated those gains, but to look underneath the surface at individual price action. Specifically, back in early-January of this year we used that same roadmap to postulate that the market was in the midst of a sustained, multi-week/month uptrend based on how the post-New Year’s gap higher was digested by the indices, on top of a proliferation of high probability individual issues setting up properly. Those many individual issues were then permitted by the market to break out and hold those moves, with even more issues then setting up behind the leaders to break higher.
Applying that same form of analysis to the current market, the major averages have not only valiantly held the gains from their V-shaped rallies into July, but they actually pushed higher yet late-last week to make fresh highs–All-time highs in the case of the S&P and Russell, and multi-decade highs in the case of the Nasdaq.
So, by inference, should we now expect another sustained leg higher in the market?
There are two main arguments which run counter to that bull thesis, with one bull retort.
The issue I see with expecting an imminent broad market move up to, say, 1800 or even 2000 on the S&P 500 is that the price action underneath the surface is not as impressive as it was earlier this year. As evidence of that argument, consider the top pane on the weekly chart of the S&P, below.
For reference, the RSI is simply the “Relative Strength Index” used to identify changes in technical momentum. Above 50 is generally considered a bullish RSI, with above 70 viewed as overbought. Trending below 50 is considered a bearish RSI pattern, with below 30 considered oversold. In both instances, below, we are looking at weekly chart RSI’s over 80, indicating wildly overbought conditions.
What you will notice is that even though the S&P closed last week essentially right at new all-time highs, the RSI was slightly lower than it was at the May highs (again, please look at the top pane of this weekly timeframe).
By nature, divergences resolve one way or the other. And if you are pointing to this as evidence of a major, multi-year top, recall how many other potentially negative divergences this year have resolved in favor of the bulls. Beyond that, the RSI still well above 50 on the weekly and thus remains in bullish territory. Hence, this RSI analysis is not sufficient evidence to call a major top to the market, which remains a uniquely difficult task in a market which is trending higher (recall how many times you have read that phrase throughout 2013 in these Strategy Sessions).
But what it does indicate is a market which is becoming more selective…
(continued)
New look is a bit hard to get used to.