U.S. Pat. stock markets have again hit a difficult period. The and all ended last week for a third consecutive week while it was eliminated for a fifth consecutive week.
Most market guards point to continuing trade problems in the US and China as the primary culprit. But a popular market technical meter has told a different story.
An important market indicator, the relative strength index (RSI), reported at the end of April that the large rally started after Christmas had become overbought and was vulnerable to a sell-off. And indeed, like the RSI, which indicates both the strength and the potential direction of the momentum or individual asset momentum, the shares have been struggling since then. Also the closing of Friday suggested that a big rebound is not yet available.
The uptrend after Christmas was incredibly friendly, but investors should always keep a close eye on whether the trend is about to turn around. Really smart investors know that a friendly trend will bite you sooner or later. That is why familiarity with the RSI is perhaps the best friend of a trend watcher.
The RSI for the S&P 500 hit 73.5 on April 30.
NASDAQ Composite Weekly TTM with RSI
The RSI of the NASDAQ was the day before with 76 reports.
For those unfamiliar with RSI characteristics, a measurement above 70 is a warning. A measurement above 75 suggests that a top is available. Above 80 is a serious sales signal.
Similarly, when an RSI falls below 30, this is a sign that a bottom is near. It also indicates that a rally is forming.
In fact, the RSI values ​​for the S&P 500 and NASDAQ (and the Dow) approached 30 on May 13, when heavy sales hit US stocks. However, they did not move decisively lower.
As of Friday, the RSIs for all three indices were stuck in the 40s. They have been unable to get higher and have been around 40% or more below their highs by the end of April. In addition, they can each drift off until there is a real catalyst such as a real American-Chinese trade agreement.
RSI and other similar technical indicators are crucial components of the current automated trading strategies. There are so many entries in the algorithms that automatically control buying and selling that the minds of people simply cannot process all that information quickly enough. The use of RSI values ​​for automated trading therefore triggers buying and selling decisions. That is why an index can seem to rise or fall several percentage points instantly.
What has happened since the end of April has happened repeatedly in recent years, now that computers are increasingly being traded. In December, The Wall Street Journal stated that 85% of trading took place at the end of last year through automated algorithms and passive investment strategies that just followed the market.
It is also true that markets mirror each other more closely. After the election of President Donald Trump in 2016, all shares in the United States, Japan, Brazil and India increased by 40% until last week.
Still, although RSI is a good indicator, it is not perfect. It will tell you that a top or bottom is coming, but it won't tell when.
The ugly sale in the fall of 2018 was a dramatic demonstration of this reality. It started innocently enough. The market had risen in the summer despite President Trump's criticism of the Federal Reserve, inflation threats and other fundamental headwinds.
At the end of August and September the NASDAQ, S & P 500 and Dow started flashing all overbought signals via their RSI & # 39; s. Stocks began to float. In mid-October, the drift became a slump that changed just before Christmas into a global near-panic
The Dow fell nearly 12% in the fourth quarter. The S & P 500 fell 14%, just like that of Germany. The NASDAQ fell by 17%; Index did that too.
Christmas Eve sales were the worst US stock market ever on Christmas Eve. But by then the RSI & # 39; s for the Dow, S & P 500 and NASDAQ were blinking buy signals. The RSI of the S&P 500 hit 19 on 24 December, a level that has not been observed even during the 2008 financial crisis
You cannot ask for a serious buy signal. And indeed, the rally started on December 26.
