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Suggestions of a broad market top

August 11, 2014

In my methods section, I state that divergences on the 14 week RSI have marked many important turns and this is the case not just for equity indices.

Nasdaq 100 Index

NDX WEEKLY RSI MACD 110814

  • The index formed divergences across the peaks of the 14 week RSI and the MACD in 2012, leading to an eight week decline
  • The index has similar divergences now and the week ending 01 August moved the RSI back below 70

Monthly divergences

Monthly divergences on the RSI are even rarer and on the Dow Jones Industrial Average, have marked important turning points.

Dow Jones Industrial Average

DOW MONTHLY RSI 110814

  • The index showed divergence in December 1999, although this was not the first monthly divergence in that advance
  • There was a form of divergence in October 2007, although the intervening RSI low was above 70 (does that really matter?)
  • The index has now formed a monthly RSI divergence and July was a reversal month, moving higher before finishing below June’s close (and low)

Historically, monthly RSI divergences marked turns in:

August 1987 – before the crash
December 1974 – the bear market low
February 1966 – a high not conclusively beaten until 1982
January 1960 – a high not beaten for 16 months
May 1946 – a high not beaten for four years
August 1929 – although the intervening RSI low was above 70 (does that really matter?) and there were other divergences on the way up that were blown away

So there are more monthly divergences than market peaks but history shows they are worth heeding.

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