Long-Term RSI Analysis on the S&P 500 ~ The Risk Averse Alert

Sunday, September 13, 2009

Long-Term RSI Analysis on the S&P 500

Here is a long view likewise supporting the case made Friday that, although the bear market beginning October 2007 is likely to lead major indexes much lower sometime over the next year or three, the present period might see major indexes stubbornly hold up as the current counter-trend rally phase completes...

SPX weekly

Thirteen years a sideways trading S&P 500 is seeing its relative strength deteriorate. Thus, risk of the S&P 500's eventual collapse gains further substantiation. Nothing demonstrating stabilization (indicating a base forming as the index trades sideways) is being evidenced in the price-RSI relationship.

Add the fact that no well-defined RSI bottoming process preceded the S&P 500's rally off March '09 bottom (unlike July '02 - March '03) and odds are increased the ongoing advance is but a bounce in a yet completed bear market.

Further, relative strength coincident with the S&P 500's bounce off March '09 bottom presently has RSI pressing the upper end of its [declining] trend since 2004. Thus, it is reasonable that, near-term, underlying weakness could begin to materialize (negatively affecting RSI), and persist over some time preceding the S&P 500's collapse.

Finally, that witting suckers for dead equity presently appear evident makes the similarity RSI currently shares with its behavior off '03 bottom mildly compelling ... this by the fact that, once then-dying equity (as opposed to today's dead equity) could no longer be levitated by a massive expansion of mortgage debt targeting the riskiest of borrowers the stock market, whose relative strength had been deteriorating for a few years, collapsed.

Thus, expecting underlying weakness to develop while the S&P 500 completes its wave C (off March '09 bottom) over some indeterminate weeks ahead appears entirely reasonable given price-RSI behavior subsequent to the late-2003 RSI peak. Alternatively (and, possibly, additionally), the first leg of the stock market's projected, pending collapse might, instead, come to pass and then be followed by another prolonged period featuring suckers taking their last gasp of hope that, the status quo over the past several decades might be restored.

Either way, look for RSI to present a clear picture of underlying technical deterioration prior to any earth shattering stock market collapse. Indeed, there's a case to be made this clear picture already is before our very eyes...

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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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