And we’re back to bullish.
What a strange market this is.
One of the most reliable technical indicators we utilize to tell us the strength of the market is giving outlier signals right now. The Relative Strength Index (RSI) is a momentum indicator that looks at the pace of recent price changes to determine whether a stock is ripe for a rally or a selloff. We use it not only as an excellent indicator of overbought and oversold conditions, but it can signal when to buy and sell.
Over the years, we’ve found the RSI to be a hidden gem, using it successfully over all timeframes, especially the Dailies. One of the things we love about it is its accuracy. The other thing we love is that, unlike other technical indicators that can be erratic and choppy, this index tends to be slow and smooth. It usually shows a trend change every month to a month and a half, or around 8-12 reversals a year, allowing us to ride a trend for many days. But not now.
Over the past three months, the RSI has signaled seven reversals and three in just the past month. That’s more than double the usual trend reversals, and that has us taking notice. Just this time last week, the S&P 500 closed at a five-month low, while the Russell 2000 Small Cap closed at its lowest point in three years. And yet, out of the blue, the RSI indicated a reversal in trend once again, the third reversal in just four weeks. And now stocks are suddenly bursting out to the upside.
What this all tells us is that there is an ongoing war raging between the bulls and the bears, with no clear winner determined just yet. And until a winner is declared, we may be stuck in this wild back and forth. Looking back on the few previous periods when the stock market experienced such fast and furious RSI gyrations, the eventual victor moved the market substantially. Until this chop slows down and the market provides us with a clear, longer-lasting direction, it may be best not to get overly excited or exposed in either direction.
The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.
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