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Relative Strength Indicator: Still A Market Top!
Figure 1 is a weekly chart of the SP500. The indicator in the lower panel is a composite that looks at the relative strength of the 9 SP500 sectors: Materials, Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology and Utilities. The indicator (red line) has been smoothed with a 39 week exponential moving average (black line). When looking at the data, which goes back to 2001, we have noted in past articles how effective the indicator was at identifying intermediate term market tops. In other words if an investor was patient, they could get better entry points.
Figure 1. Relative Strength Indicator
In mid June, we noted that the indicator was in the "Danger Zone". Shortly thereafter we provided data to these observations; when the indicator reached these extreme levels, there were always better points of entry. In late July, the extreme reading was "Pointing to a Market Top". The indicator still remains at a high value. Our interpretation has been the same for over 5 months now: our relative strength indicator remains consistent with a market top, and the indicator still continues to act within the realm of prior instances when it was extreme. Once again, we are closer to the end of this rally than the beginning.
The blue vertical highlights shows the current situation when the indicator first became extreme, which was in May 5, 2013. The SP500 was at a value of 1633. Today it is trading near 1650.
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RSI is useful when used with another indicator, such as moving averages. Too many people on ZH have tried to pick tops in the market last few years and failed miserably.
Enron and the Gulf war immediately preceded one of the greatest bull markets in history. Fundamentals don't matter in a fixed economy. Never have and never will. If they did matter the market would have crashed already.
I was at a wedding a few years ago in Arizona that Tom Demark hosted. He is the inventor of the Relative Strength Index.
After telling him how much I like RSI, he responded, "It is a good thing you know how to use it because I sure don't".
He basically told me the index is a worthless technical tool.