at the bottom of this weekly SPY chart is the SPY price action plot with the 2-year BB setting represented by the 104,2 weekly BB setting
* as of January 17, 2020 the SPY price action has resided above the SPY 104,2 weekly Upper Bollinger Band on a steady basis and this is what the bullish case is counting on for future action into 2020
BB's adapt to the most current chart development by the price action and that is why BB's are to be believed NOT necessarily faded because price action appears to be Over Done
shown below are my personal notes while attending a Webinar by the professional CFRA research organization, and notes are taken real-time and emailed to myself real time
Date: Wed, Dec 11, 2019 at 11:12 AM
Subject: Re: Sam Stovall in CFRA webinar today
a lot of statistics for the different regions of the world, that Sam showed on one slide, and in his discussion ... he stated there are NO signs of recession coming in any of these regions during 2020 based on both the IMF forecast and his S&P Capital IQ forecast ...
looking at the stats he shows better earnings growth in Emerging Markets for 2020 than in the US stock market using the S&P 500 stocks ... he also showed a separate slide presenting the Emerging Markets compared to the S&P 500 and that the Emerging are underperforming at the lower BB location , which to him means it is nearly 100% that the ratio will improve to the upside and Emerging will do better in 2020
On Wed, Dec 11, 2019 at 9:33 AM
Oil price increase on avg in 2020 by $2.80
On Wed, Dec 11, 2019 at 9:31
Sam says
no FED rate cuts or rate rises in 2020
On Wed, Dec 11, 2019 at 9:30 AM
Sam has ALL economic AND fundamental forecasts into 2020 end for both Global and the US at improved or flat vs. the 2019 stats
On Wed, Dec 11, 2019 at 9:29 AM
Sam says
mid December price low to the January price high is a consistent event in all years when price is weak in the 1st half of December
On Wed, Dec 11, 2019 at 9:27 AM
Sam says 45% of the total revenue for the 500 companies in the S&P come from oversees, so the tariff situation has been responsible during 2019 for NOT meeting the expectations by Sam's S&P IQ research organization for company earnings growth in 2019
On Wed, Dec 11, 2019 at 9:14 AM
Sam Stovall says
we are now underestimating company earnings growth and the US GDP growth, and those items will positively surprise in 2020 vs. current expectations ...
so stock prices are now telling us this expected 2020 outcome at this time in 4th Qtr 2019 since prices lead the fundamentals before the fundy's improve
stock up trends do not die of old age, they die of fright - fear of recession is the cause
4th year of Presidential cycle is 84% of the time positive ... normally up 6.4% in 4th year
SPY weekly RSI-14 value at day's end since 2 days before the RSI low -
33.08 RSI declines day #1 RSI rests only slightly above its weekly close low in December 2018 33.92 RSI rises day #1 RSI rests above its weekly close low in December 2018 32.63 RSI declines day #2 RSI rests only slightly above its weekly close low in December 2018 36.25 RSI declines day #1 RSI rests above its weekly close low in December 2018 37.90 RSI rises day #1 RSI rests above its weekly close low in December 2018 34.30 RSI declines day #1 RSI rests only slightly above its weekly close low in December 2018 37.48 RSI rises day #3 RSI rests above its weekly close low in December 2018 31.32 RSI rises day #2 RSI rests slightly below its weekly close low in December 2018 29.56 RSI rises day #1 RSI rests below its weekly close low in December 2018 20.72RSI continues to drift lower RSI rests below its weekly close low in December 2018 21.67 RSI continues to drift lower RSI rests below its weekly close low in December 2018 23.42 RSI continues to drift lower RSI rests below its weekly close low in December 2018
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monthly SPY and monthly RSP with 15,2 Bollinger Band settings
* greater relative price strength by the 100 largest Market Capitalization dollar size stocks contained within the $OEX index and also within the S&P 500 index is the only reason the SPY is attempting to hold near/above its monthly lower Bollinger Band, while at the same time RSP has consecutive monthly prints below the monthly lower Bollinger Band
RSI as explained at StockCharts.com in its 2013 version -
Parameters The default look-back period for RSI is 14, but this can be lowered to increase sensitivity or raised to decrease sensitivity. 10-day RSI is more likely to reach overbought or oversold levels than 20-day RSI. The look-back parameters also depend on a security's volatility. 14-day RSI for internet retailer Amazon (AMZN) is more likely to become overbought or oversold than 14-day RSI for Duke Energy (DUK), a utility.
RSI is considered overbought when above 70 and oversold when below 30. These traditional levels can also be adjusted to better fit the security or analytical requirements. Raising overbought to 80 or lowering oversold to 20 will reduce the number of overbought/oversold readings. Short-term traders sometimes use 2-period RSI to look for overbought readings above 80 and oversold readings below 20.
Overbought-Oversold Wilder considered RSI overbought above 70 and oversold below 30. Chart 3 shows McDonalds with 14-day RSI. This chart features daily bars in gray with a 1-day SMA in pink to highlight closing prices because RSI is based on closing prices. Working from left to right, the stock became oversold in late July and found support around 44 (1). Notice that the bottom evolved after the oversold reading. The stock did not bottom as soon as the oversold reading appeared. Bottoming can be a process. From oversold levels, RSI moved above 70 in mid September to become overbought. Despite this overbought reading, the stock did not decline. Instead, the stock stalled for a couple weeks and then continued higher. Three more overbought readings occurred before the stock finally peaked in December (2). Momentum oscillators can become overbought (oversold) and remain so in a strong up (down) trend. The first three overbought readings foreshadowed consolidations. The fourth coincided with a significant peak. RSI then moved from overbought to oversold in January. The final bottom did not coincide with the initial oversold reading as the stock ultimately bottomed a few weeks later around 46 (3).
Chart 3 - RSI Overbought Oversold
Like many momentum oscillators, overbought and oversold readings for RSI work best when prices move sideways within a range. Chart 4 shows MEMC Electronics (WFR) trading between 13.5 and 21 from April to September 2009. The stock peaked soon after RSI reached 70 and bottomed soon after the stock reached 30.
Chart 4 - RSI Overbought Oversold
Divergences According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. Chart 5 shows Ebay (EBAY) with a bearish divergence in August-October. The stock moved to new highs in September-October, but RSI formed lower highs for the bearish divergence. The subsequent breakdown in mid October confirmed weakening momentum.
Chart 5 - RSI Divergences
A bullish divergence formed in January-March. The bullish divergence formed with Ebay moving to new lows in March and RSI holding above its prior low. RSI reflected less downside momentum during the February-March decline. The mid March breakout confirmed improving momentum. Divergences tend to be more robust when they form after an overbought or oversold reading.
Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend - and yet the downtrend continues. Chart 6 shows the S&P 500 ETF (SPY) with three bearish divergences and a continuing uptrend. These bearish divergences may have warned of a short-term pullback, but there was clearly no major trend reversal.
Chart 6 - RSI Divergences
Failure Swings Wilder also considered failure swings as strong indications of an impending reversal. Failure swings are independent of price action. In other words, failure swings focus solely on RSI for signals and ignore the concept of divergences. A bullish failure swing forms when RSI moves below 30 (oversold), bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a move to oversold levels and then a higher low above oversold levels. Chart 7 shows Research in Motion (RIMM) with 10-day RSI forming a bullish failure swing.
Chart 7 - RSI Failure Swing
A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70 and then breaks its prior low. It is basically a move to overbought levels and then a lower high below overbought levels. Chart 8 shows Texas Instruments (TXN) with a bearish failure swing in May-June 2008.
Chart 8 - RSI Failure Swing
Trend ID In Technical Analysis for the Trading Professional, Constance Brown suggests that oscillators do not travel between 0 and 100. This also happens to be the name of the first chapter. Brown identifies a bull market range and a bear market for RSI. RSI tends to fluctuate between 40 and 90 in a bull market (uptrend) with the 40-50 zones acting as support. These ranges may vary depending on RSI parameters, strength of trend and volatility of the underlying security. Chart 9 shows 14-week RSI for SPY during the bull market from 2003 until 2007. RSI surged above 70 in late 2003 and then moved into its bull market range (40-90). There was one overshoot below 40 in July 2004, but RSI held the 40-50 zone at least five times from January 2005 until October 2007 (green arrows). In fact, notice that pullbacks to this zone provided low risk entry points to participate in the uptrend.
Chart 9 - RSI Trend ID
On the flip side, RSI tends to fluctuate between 10 and 60 in a bear market (downtrend) with the 50-60 zone acting as resistance. Chart 10 shows 14-day RSI for the US Dollar Index ($USD) during its 2009 downtrend. RSI moved to 30 in March to signal the start of a bear range. The 40-50 zone subsequently marked resistance until a breakout in December.
Chart 10 - RSI Trend ID
Positive-Negative Reversals Andrew Cardwell developed positive and negative reversals for RSI, which are the opposite of bearish and bullish divergences. Cardwell's books are out of print, but he does offer seminars detailing these methods. Constance Brown credits Andrew Cardwell for her RSI enlightenment. Before discussing the reversal technique, it should be noted that Cardwell's interpretation of divergences differs from Wilder. Cardwell considered bearish divergences as bull market phenomenon. In other words, bearish divergences are more likely to form in uptrends. Similarly, bullish divergences are considered bear market phenomenon indicative of a downtrend.
A positive reversal forms when RSI forges a lower low and the security forms a higher low. This lower low is not at oversold levels, but usually somewhere between 30 and 50. Chart 11 shows MMM with a positive reversal forming in June 2009. MMM broke resistance a few weeks later and RSI moved above 70. Despite weaker momentum with a lower low in RSI, MMM held above its prior low and showed underlying strength. In essence, price action overruled momentum.
Chart 11 - RSI Reversals
A negative reversal is the opposite of a positive reversal. RSI forms a higher high, but the security forms a lower high. Again, the higher high is usually just below overbought levels in the 50-70 area. Chart 12 shows Starbucks (SBUX) forming a lower high as RSI forms a higher high. Even though RSI forged a new high and momentum was strong, the price action failed to confirm as lower high formed. This negative reversal foreshadowed the big support break in late June and sharp decline.
Chart 12 - RSI Reversals
Conclusions RSI is a versatile momentum oscillator that has stood the test of time. Despite changes in volatility and the markets over the years, RSI remains as relevant now as it was in Wilder's days. While Wilder's original interpretations are useful to understanding the indicator, the work of Brown and Cardwell takes RSI interpretation to a new level. Adjusting to this level takes some rethinking on the part of the traditionally schooled chartists. Wilder considers overbought conditions ripe for a reversal, but overbought can also be a sign of strength. Bearish divergences still produce some good sell signals, but chartists must be careful in strong trends when bearish divergences are actually normal. Even though the concept of positive and negative reversals may seem to undermine Wilder's interpretation, the logic makes sense and Wilder would hardly dismiss the value of putting more emphasis on price action. Positive and negative reversals put price action of the underlying security first and the indicator second, which is the way it should be. Bearish and bullish divergences place the indicator first and price action second. By putting more emphasis on price action, the concept of positive and negative reversals challenges our thinking towards momentum oscillators.
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