The S&P 500 Has an RSI Divergence Problem

As noted, I am long SPY and got longer on yesterday’s decline (ouch). That’s the context for this morning’s post. I have some shorts too, but not enough to compensate. I’ve been leaning toward a resumed US market bounce, although that’s not looking good right now and my positioning and tolerance are limited as I just want to get this pattern off my screen either to the upside or the downside.

Beyond that SPX has a bearish RSI divergence, which we look at from short to long-term views. The daily chart shows the fading momentum as SPX ground upward all summer toward a top-test that I’d expected to fail, but which did not… until it did! RSI was very weak at that top.

SPX weekly shows the long, grinding negative divergence (from a not aggressively overbought RSI in late 2013) into the 2015 top (that wasn’t) vs. 2018’s more dynamic specimen. On this go round it became extremely overbought in January and has had a volatile year that is driving RSI down and up much more aggressively.

SPX monthly shows what happened during a long, grinding RSI divergence in 1996-1998. It resolved in a plunge (like today) and then tacked on a new massive leg of the bull market despite continued RSI negative divergence that finally resolved into a top and bear market in 2000.

In 2008 RSI spiked down (like today) after a shorter RSI overbought and failure event. It just kept on going down, do not pass go, do not collect $200.

2015 was an animal much like 1998. It had a spike down off of RSI divergence but this was just a prelude to a big ramp up to a massively overbought condition. It differs from 1999-2000 in how overbought it became, but it has put in an extremely overbought condition and plunge that is even more dynamic than 2008.


So there you have it. During the 2015 top (that wasn’t) I asked whether it would be 1998 or 2007. The post-election pop above the 2015 highs answered that question in a positive way. The bull resumed. Now SPX is challenged once again. Pending the current bounce scenario, I would not expect such a joyous outcome this time. The dynamic, shorter-lived RSI overbought and failure condition implies that [a negative outcome] but there are a lot of other indicators to follow along the way. No single indicator, whether technical or macro, is the secret sauce.

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