Equities May Recover Based on Other Ways to View Momentum

Based on a short-term view, things appear quite extended to the downside in the equity market. I tweeted yesterday that I’d be surprised if we didn’t get some kind of bounce following where we closed on Friday. From what I’m seeing after yesterday’s price action, I think it’s very possible price advances from here. A lot of traders will be setting their scopes on the May high if we begin to catch some bids, personally I don’t know nor do I care if we get there. Patience is a virtue.

In Constance Brown’s book, Technical Analysis for the Trading Professional, she discusses different ways we can view the Relative Strength Index. Two of the methods Brown mentions are what I’m going to look at today.

In the chart below I’ve put Bollinger Bands on top of the 14-period Relative Strength Index. As you can see, when RSI breaks out from the bands, momentum appears extended – without taking into consideration the nominal value of the indicator. We can also apply trend line analysis to momentum. For example, RSI is currently sitting above a rising trend line from the November lows. Based on both of these methods of looking at the RSI indicator, the bias appears to be to the upside.

So while most of the time we view momentum, specifically the Relative Strength Index, based on divergences and where the indicator is in relation to being overbought or oversold, there are other ways we can view the data.

However, we can still observe that the RSI is above 50 – staying in the bullish range as it finds the previously mentioned trend line support. The S&P 500 ($SPX) is also at support as we connect the November, December, and intraday low in April. The slope of this trend is higher than desired, but if this period of weakness does in fact turn into just healthy consolidation, then the bulls may be able to lick their wounds and keep marching. Time will tell.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.