HISTORICAL BULL AND BEAR ZONES FOR RSI -- S&P 500 RSI BOUNCES OFF LONG-TERM SUPPORT ZONE -- A BREADTH THRUST FOR THE MCCLELLAN OSCILLATOR -- FINANCE, RETAIL AND HOUSING ETFS LAG BROADER MARKET -- OIL HITS RETRACEMENT RESISTANCE ZONE
HISTORICAL BULL AND BEAR ZONES FOR RSI... Link for todays video. As noted in prior commentaries, there are bull market zones and bear market zones for RSI. In general, RSI ranges from 40 to 80 in an uptrend and 20 to 60 in a downtrend. These are forty point ranges. The exact range may depend on the characteristics of the security. More volatile securities may require a wider range, less volatile securities may require a narrower range. Like all indicators, these guidelines are not fool proof and there will be exceptions. It is important that supporting evidence outweighs the exceptions. The market is all about playing the percentages. Overall, the probability of an uptrend is above average when RSI ranges between 40 and 80. Conversely, the probability of a downtrend is above average when RSI ranges between 20 and 60.
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Chart 1
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Chart 2
Chart 1 shows the S&P 500 in a downtrend from early 2001 until early 2003. The downtrend started when the S&P 500 broke support and RSI broke below 40. There were early breaks below 40 in the fourth quarter of 2000 and a decisive break in the first quarter of 2001. Once the downtrend got underway, RSI established a resistance zone around 50-60 that held 5-6 times. Chart 2 shows this downtrend reversing when the index broke resistance and RSI broke above 60 in the first quarter of 2003. Once the uptrend was underway, the 40-50 zone turned into support and held five times. There was a dip below 40 in July 2004, but this proved to be the exception.
RSI BOUNCES OFF LONG-TERM SUPPORT ZONE... With the advance over the last two weeks, 14-week RSI bounced off the 40-50 zone for many key indices. This is important because it keeps the long-term uptrend intact. Chart 3 shows the S&P 500 over the last two years. RSI broke above 60 and the index broke above resistance in July 2009. RSI tested the 40-50 zone twice since the July shift from downtrend to uptrend: once in February and again in May-June. The surge over the last two weeks pushed RSI back above 50 to reinforce this support zone. In addition, the bounce reinforces the importance of the February-May-June lows for the S&P 500. The bulls still own the long-term trend. A break below support in the S&P 500 and RSI would signal the start of a long-term downtrend. Chart 4 shows a similar situation for the Nasdaq.
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Chart 3
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Chart 4
Chart 5 shows the NY Composite with 14-week RSI dipping below 40 in early June. As noted above, there will be exceptions. Overall, 14-week RSI held the 40-50 zone for most of the major indices. To its credit, the NY Composite broke the February low, but quickly firmed and moved right back above medium-term resistance (red dotted line). A broadening formation could still be taking shape, but a breakdown has been put on hold with the recovery over the last two weeks.
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Chart 5
A BREADTH THRUST FOR THE MCCLELLAN OSCILLATOR ... Chart 6 shows the Nasdaq McClellan Summation Index ($NASI) turning up sharply and breaking its 10-day moving average over the last eight days. The bulls are in good shape as long as this indicator holds its 10-day SMA. I am showing this chart with Summation Index overlaid on the Nasdaq price plot. This makes it easy to compare swings in the indicator and the index.
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Chart 6
The Nasdaq McClellan Oscillator ($NAMO) is shown in the indicator window. To review, the McClellan Oscillator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances (advances less declines). It is basically a momentum oscillator for Net Advances. The McClellan Summation Index is a cumulative measure of the McClellan Oscillator. The summation index rises when the McClellan Oscillator is positive and falls when the McClellan Oscillator is negative. As the chart shows, the McClellan Summation Index fell from late April until early June as the McClellan Oscillator remained consistently negative. More recently, the oscillator surged from below -50 to above +50. This 100 point swing from negative territory to positive territory is a bullish breadth thrust. A similar bullish thrust occurred in February. Chart 7 shows the NYSE McClellan Summation Index and Oscillator with similar characteristics.
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Chart 7
FINANCE, RETAIL AND HOUSING ETFS LAG BROADER MARKET... Even with RSI holding long term support and a positive breadth thrust in the McClellan Oscillator, I am concerned with relative weakness in some key groups. In particular, finance, housing and retail related ETFs are showing relative weakness. The late May and early June highs serve as a performance benchmark. Securities trading above these highs show relative strength and upside leadership. Securities trading below these highs show relative weakness. Chart 8 shows the S&P 500 ETF (SPY) breaking above resistance and holding this breakout over the last few days. The ability to hold the breakout shows persistent buying pressure - which is quite positive. In contrast to SPY, chart 9 shows the Financials SPDR (XLF) below its corresponding resistance level. The ETF surged with the rest of the market, but fell short of a breakout. Also notice that the price relative remains in a downtrend. Chart 10 shows the Homebuilders SPDR (XHB) in a clear downtrend with a lower low in early June. The bounce above 16.5 fell well short of the late May high and XHB shows relative weakness. Chart 11 shows the Retail SPDR (XRT) falling short of resistance and forming a small falling flag the last four days. A flag breakout would project a break above resistance and put XRT back on par with the market.
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Chart 8
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Chart 9
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Chart 10
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Chart 11
OIL HITS RETRACEMENT RESISTANCE ZONE... Oil continues to takes its cue from the stock market. In fact, the weekly chart for West Texas Intermediate ($WTIC) looks quite similar to the weekly chart for the NY Composite. This is hardly surprising when you consider that energy stocks account for around 15% of the NY Composite. Chart 12 shows $WTIC holding support around 70 for at least the third time in eight months. Technically, a lower low formed in May and this means we could see a broadening formation take shape. As with the NY Composite, 14-week RSI dipped below 40 and quickly recovered. This keeps the bigger uptrend alive as far as I am concerned. Chart 13 shows daily prices with resistance in the 78 area. This area marks a 50-62% retracement of the May decline. In addition, oil became overbought after a surge from 70 to 78 (11%) in just 8 days. At the very least, $WTIC looks ripe for a pullback or a consolidation. Prior resistance and the 11-June low mark support around 74-76. A pullback into this zone would relieve overbought conditions. The indicator window shows oil and the S&P 500 (red). These two are moving in lock-step over the last five months. Continued strength in the stock market would bode well for oil.
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Chart 12
