A LOT OF MARKET INDEXES ARE TESTING 2005 HIGHS WHILE IN OVERBOUGHT TERRITORY -- WHY I USE A 9-DAY RSI LINE

A KEY TEST IS GOING ON IN A LOT OF INDEXES... While most market observers are watching the Dow and the S&P 500, it's important to recognize that several market indexes have already reached their 2005 highs and are undergoing an important test of that resistance barrier. In my earlier update today, I showed a large cap value ETF testing its March high. Chart 1 shows the S&P Large Cap Value Index (on which the ETF is based) right up against its early March high. That makes this a moment of truth for that index. The 9-day RSI line shows the index to be in overbought territory over 70. That raises the possibility that the market may encounter some profit-taking at current levels. All of the other stock indexes charted below show the same picture.

Chart 1

S&P SMALL CAP INDEX TESTS MARCH HIGH ... Last week I showed the S&P 400 MidCap Index breaking through its March high. Now it's the S&P 600 Small Cap Index that's testing that resistance barrier. The fact that the SML is also in overbought territory raises a short-term warning flag.

Chart 2

RUSSELL 1000 INDEX IS TESTING RESISTANCE... The Russell 1000 Large Cap Index is also testing its early March high near 660. Its 9-day RSI is trading over 70. Anytime a stock or an index reaches an old high, that represents an important test. That's especially true if the prior runup has taken index to an overbought condition -- as this one has.

Chart 3

WILSHIRE 5000 TESTS ITS 2005 HIGH ... The Wilshire 5000 is the broadest market average that we have to follow. Chart 4 shows the WLSH right up against its March high -- just like all the others shown above. That tells me that the market has reached another critical juncture. It also tells me that it's time to be a little more cautious until the tests of those 2005 highs are resolved one way or the other. You'll notice that I've plotted two RSI lines under Chart 4. The top line is the 14-day RSI while the lower is the 9-day. I'm doing that to demonstrate why I favor the 9-day version over the 14 day. The main value of the RSI line is when it moves into oversold territory under 30 or overbought territory over 70. The 14-day RSI line has done neither since the start of 2005. That means it's not sensitive enough. By contrast, the 9-day RSI gave a oversold buy signal (under 30) during April and has touched the 70 level several times. In fact, it's over 70 right now. That's why I prefer using the 9-day RSI. It's a little more sensitive and, therefore, more useful.

Chart 4