It’s so easy to get bogged down by the numerous indicators, waves, and cycles that can be applied to a market. There are tons of different momentum indicators, breadth indicators, and volume indicators. Each tell essentially the same story as it’s brethren. I’ve spent a great deal of time posting and tweeting various charts on differing time frames that look at the equity market from different angles.
We’ve discussed sentiment, we’ve looked at narrowing breadth, and all the charts that I think could end the rally. But sometimes we need to just look at price. Okay price and RSI.
We don’t need to make this difficult. What price is currently telling us is that the S&P 500 ($SPX) is in an uptrend – making higher lows and higher highs since November ’12. The green trend line shows us where support is likely to be on any drops and helps identify the trend. We also have the previous lows that will could be support if the trend breaks and we begin to correct.
If we look at a simple momentum indicator like the Relative Strength Index, we can see it’s diverging from price – making lower highs while price is making higher highs. I’ve talked about this nearly at nauseam for the last few weeks. When we have seen drops in price the RSI indicator has been able to stay above 40, a positive sign for equity bulls. All the negative divergence is telling us is that the car tires are losing a little air. This doesn’t mean the car drives off into a ditch, it’s just a warning that the driver needs to be aware of.
Price will let us know when things are looking bearish. Until we get a break of the uptrend all of the other charts we’ve looked at don’t matter! So why do I write about them? Because they are warnings. They let us know something is happening ‘below ground’ so to speak. Understanding sentiment, knowing about retracements and breadth are important. It’s shouldn’t be thrown out the window as various indicators and charts do have their place. We are in an uptrend, the trend could take us to 1700 in a month for all we know or it could begin to correct tomorrow. Technical analysis doesn’t have to be difficult and we shouldn’t stress over every tick.
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+.
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Hi! Was just passing through and saw this. I would also add the observation that the S&P telegraphed this uptrend near the very beginning by pushing the RSI above the 60 and it never went below 40. The trendline and the 40 level both provide support and there is no technical reason to really go short. My question, though, is how would you change tactics when that happens? Would you expect a range or a trend reversal, and what would you be looking for?
Great question! I would evolute the market landscape and the price action that lead to the break. Markets don’t operate in a vacuum. So while I would reference the support mentioned in the post I would see how other markets are behaving as well.
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