I’ve circled the times we’ve seen a low RSI on the daily chart make a double dip into oversold territory. Each instance was followed by a rally, both in the bear phase of 2008 and the bull phase of 2009-2010:
Prophet Chart from Think or Swim
SPX futures are looking pretty oversold here, and you could say there’s a bit of negative divergence on the hourly:
TD Ameritrade
The US markets are actually among the least oversold around the world. Japan, Australia, China and lots of Europe are down a lot more, which tells me there’s room for a corrective bounce here.
Here’s Australia’s main stock index, for example:
Bloomberg
Of course, I think all stock indexes are going to make deep new secular lows in the not-so-distant future, and the land down under will finally be welcomed to the depression as its real estate bubble pops and commodities decline again.
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Very high sentiment readings last week, up to 20:1 bulls:bears. Quite a change from a few weeks ago, when traders were bearish by 4 or 5 to 1.
If the tide is turning back to the deflation trade, expect a rout in commodities like the second half of 2008. Yes, gold rose as stocks and other commodities fell last week, but it did the same thing when it first broke $1000 in early 2008 as stocks fell into the Bear Stearns crisis. The corellation with stocks could easily switch positive again as it did in ’08.
I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.
EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.
In government and mainstream media logic, the bailouts are supposed to be good for the euro. With EUR/USD pushing 1.27, it appears that somebody forgot to tell the market that implied guarantees for GIPSI nations to the tune of 100s of billions of new euros should strengthen the value of those in circulation.
Here’s a 10-year view of the spot market, revealing just how much downside there is in this cross. On the other hand, the euro is getting oversold on a short-term basis, with RSI approaching the conditions preceding the short but violent rally in late ’08. It could trend a little while longer, but don’t get caught short without your stops.
TD Ameritrade
A downsloping RSI line in copper has put the brakes on earlier rally legs. The market is bumping up against it again. Keep in mind that downsloping RSI patterns like this indicate an aging trend.
Stockcharts.com
You know the one: the 5-day trailing average equity put:call ratio:
indexindicators.com
Retail options players almost never get significantly more complacent than this, and they virtually ALWAYS get creamed within a week or two, sometimes a little, sometimes a lot. If you did nothing in the market but buy puts or vol when the 5-day CPCE got under 2 standard deviations from its mean and sell or tighten your stop (use a conditional stop with options) when it reached 1SD you’d have a very nice trading career.
Couple this with the classic RSI signal from Friday, and I’d place the odds of a 2% further rise here at under 10%, and the odds of a 5% decline at over 80%. To be very conservative, wait a couple of days to confirm that the rise is broken, and use a stop against the highs, but I bet stocks stall here for no more than a week then fall hard. Maybe this is Oct 2007 redux. Sure smells like a big top circus. The latest EWI publication points out that the AAII survey is again at record lows — this is not as precise a timing indicator as 5-day CPCE, but it puts it in perspective: we’re looking for a major top, so any minor top like this could be the one.
Got a double sell signal on the 90-min RSI, and a very nice weakening trend:
Prophet.net (I’m going to miss these guys — they were bought by Investools and they are shutting down the site)
This is a big, rounded top. It’s taking its time, though it is still compressed relative to the ’03 – ’07 cycle wave top.
This week’s strength was very impressive and could mean new highs on the Dow and SPX in the next couple of weeks if that previous wave is any guide. Our January-February ’10 drop was akin to May-June ’06, Feb-March ’07, and July-Aug ’07. Tops are processes, bottoms are events.
Prophet.net
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Maybe the VIX will even scoop out a big rounded bottom and fall several more points:
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Note the advance:decline ratio I threw on there as well. This was a big up day relative to everything since last summer, with 5 stocks up for every decliner. These spikes during a bull trend tend to foretell that prices will drift up some more, though not always, and they do occur in bear trends as well, when they simply serve to clear the way for a resumed decline, as in late Sept ’08. There is still a larger declining trend in the A:D spikes, indicating declining oomph during the strongest rallies, as in the year leading up to the Fall of ’08.
The A:D ratio is also a measure of jumpiness. You can see how it spiked up as fear crept into the game in summer ’07.
Of course, this market is now extremely short-term overbought and treading on very thin ice, so it could just plunge at any time. This could have been our clearing rally.
You can see that the daily A:D was nothing like earlier last year, but you still have to respect this signal.
(First published 3.3.10, 1:27PM EST)
I’ve noticed lately how well the 60-min RSI (relative strength index — a measure of oomph in price movement) has been doing, so today I decided to quantify it. The result is simply spectacular, even with a mechanical buy/sell decision that always had you in the market either long or short.
Here is a 60-day chart of the Dow, by 60-min bar. The circles are negative RSI crosses (red arrows on the bottom) and the boxes are positive crosses (green arrows). The numbers are the Dow points one might achieve by riding Dow futures from the previous signal using the signals alone, with no stop-losses. Additional signals do not add to the position, and the trade is reversed on the next opposing signal.
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I tried to be conservative with those point totals (not buying or selling top or bottom tick), and some of those moves may have been missed due to opening gaps (where the price has already moved so far by the time of the opening bell), but you get the idea. It comes out to 1425 Dow points, even having been short for the whole 500 point drop in late January, which a stop-loss could have prevented. A single mini-dow futures contract, symbol YM, requires a margin of $6825 and is worth $5 per Dow point.
Now, this is hardly a perfect reflection of actual trading, but just mechanically trading a simple signal is infinitely superior to trying to outguess the crowd based on mumbo-jumbo like the Greek situation, Barney Frank, Obama this or that, oil prices, GDP, consumer data, or any other nonsense.
Now, I don’t have to tell explain any further why I think the market will probably fall by early next week.
