Short Term Trading Member Forum

[techcharter]

SPX Relative Strength Bearish Divergence.

http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=11&dy=0&id=p32189679772

Over the past 10 months the daily chart for the SPX RSI formed a telling bearich divergence. As the market advanced the RSI was showing less strength.

Let's look at the SPX highs.
In November 2010, the Market made a recovery high and generated an extremely strong reading on the RSI for a few days. In January and February 2011 the markets continued making new highs and the RSI spent quite a lot of time at extremely strong readings. This would be expected in the middle of a long rally. Now look at the February and May 2011 RSI highs. The May 2011 RSI high was lower than the February RSI high, yet the May SPX was higher than the February SPX high. These three RSI and SPX reading form a bearish divergence. The May 2011 and July 2011 RSI highs and SPX highs were flat to slightly down, a strong indicator of a top. Both conditions were warnings.

Let's look at the SPX lows.
The November 2010, March 2011, and July 2011 SPX lows are all increasing, yet their RSI values are decreasing. This is also a bearish divergenge.

After the July August 2011 selloff, the RSI generated an extreme low reading, confirming the bearish divergences of the previous 10 months. If this recent selloff is a correction of 12+ month rally, then I would expect a bullish divergence of sorts. Unfortunately I see a bearish divergence of SPX price increase with decreasing volume.