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Relative Strength Indicates Weakness in This Bear Rally


S&P highs and RSI lows are taking us on another bumpy ride.

New Highs on Lower RSIs Are a Recent Bearish Divergence

In the piece last week titled October 2007 Shows Us How This Rally Ends, serious comparisons were made between 2007 and today. What with high oil, rising gold, a falling dollar, and a market peak, it's déjà vu all over again.

I went back to the 2007 period and noticed something else that was eerily similar with today. I noticed the Relative Strength Index (RSI) had a few eye-opening divergences, which were early warning signs of a coming crash. The RSI needs to be understood so you can have additional evidence of a fast-approaching market top.

In simple terms, an RSI reading of 70 and above is overbought and a reading of 30 or below is oversold.

On May 9, 2007, the S&P 500 made a new high at 1512 and the RSI was painting red with an overbought reading of 73.54 on the RSI. On May 12, 2007, the market went up and made another high at 1525, but the RSI made a lower high at 68.89, a bearish divergence. Then, on July 13, 2007, the S&P 500 went on to yet another new high at 1552 with another lower RSI of 62.91. Finally, the market had a quick correction to an intraday low of 1370 on August 16, 2007. That was a quick and scary 11.7% correction.

Divergences 1, 2, 3, and Then Look Out Below!

Let's look at the market today for some comparisons. August 4, 2009: The S&P 500 closed at 1005.65 with a 75.7 RSI.

September 17, 2009: The S&P 500 made a new cycle high at 1065 and a lower high of 70.74 RSI.

October 15, 2009: The S&P closed at a 1096 cycle high with another lower high of 68.52 RSI. If this was a baseball game, we may have just seen the third strike in the top of the ninth and the bull has struck out. As he heads toward the dugout, he realizes the secular bear will likely win the game.

The biggest divergence in 2007 was the October all-time high top of 1554 against the RSI of 62.21. The S&P 500 was 1552 with a RSI of 62.91. A week later, the peak of 1091 had a similar 62.73 RSI. Again, this is a lower RSI than the previous high hit on the S&P 500 in September. The 2007 divergence shows us it's time to get ready for a coming correction or crash like October 2007 to January 22, 2008, of 15.6%.

That, of course, was followed by a series of rallies and corrections until the bottom on March 6, 2009, for a total wipeout of 56%.

Buckle up because we may be in for another wild ride up and down.

Of course there have been times where the new highs and lower RSIs didn't amount to much, but let's look at some other past periods and the percentage corrections and crashes that followed. This will at least give you an idea why the lower RSI on new market highs must be respected.

March 4, 2002: A 71 RSI at a 10,586 Dow Jones Industrial Average (DJIA) close, then on March 8, 2002 at a 10,663 high and a 65.93 lower RSI. The market tanked to 8192 for a 23% drubbing until July 24, 2002.

May 21, 2001: New high on May 22, 2001, and lower RSI was made on a new market high followed by a 27% correction to September 21, 2001 low.

August 28, 2000: the DJIA had a closing high of 11,285. Then on September 6, 2000, 11,314 saw a lower RSI and market tanked 11.6% to 9975 on October 18, 2000.

December 31, 1999: New high, then January 14, 2000, had a lower RSI on a new high and was followed by a 14.7% correction to the March 7, 2000 low.

On July 30, 1997, new high, August 6, 1997, new high, lower RSI, and 16.5% market break to October 28, 1997.

June 4, 1990, new high, then on July 17, 1990, new high and lower RSI for a 17% correction to August 23, 1990 low.

On August 11, 1987, new high and August 26, 1987, new hew high, lower RSI, and followed by a 39.7% crash to October 20, 1987 low.
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