By Steve Lentz
Today is August 5th, 2019, and could very well be the initial day of a significant market correction. For the last year and a half, each successive market high has occurred with less and less momentum as the one before it. This fading momentum often foreshadows serious market corrections.
The RSI indicator was developed by Wells Wilder decades ago and is available in most all charting programs. Divergences of the RSI from price is considered a leading indicator and not a lagging one like moving averages. This is a big advantage for index traders looking for a “heads-up”.
Example from Crash of 1987
As shown above in the monthly SPX chart, the market collapse of 1987 was preceded by index highs that corresponded to lower high values of the RSI (14). This relationship is called divergence and it lasted several months in this case. It reflected the fact that the final push upward had less momentum than the one before it in 1985 and 1986. The resulting one-month plunge took the index down 36%.
Example from Collapse of 2008
As shown above, the market collapse of 2008 was preceded by an October 2017 index high that corresponded to a lower high value of the RSI (14). This divergent relationship lasted just one month and the resulting 17-month move took the index down well over 50%.
Current Day – August 5, 2019
Finally, let’s take a look at current day. The monthly SPX chart above shows a 12-month divergent relationship with three successive market highs corresponding to three successive lower highs in the RSI(14). Each move upward has less and less momentum. This divergence is extremely profound and should give the technical-based trader great cause for concern on the bullish side.
Timing is everything to investors and traders, and these are very long-term monthly charts. But the SPX index and the RSI have been, and still are, clearly signaling to us a “heads-up”. Those of us familiar with leading indicators, like RSI, should not be surprised if this week's down move turns into something more historic.