Monday, July 13, 2009

Rare Signal Speaking

Should we listen? I am referring to the % of all NYSE stocks trading above their 50 dma. Not this chart itself but the RSI (Relative Strength Indicator) for the movement in this chart. Since the start of 2002, when StockCharts began charting it, this RSI parking itself below 30 with the market trading mostly below its 140 day EMA (bear periods) has occurred only 3 times. Each time produced the same result in the market afterward. Lets look at these 3 episodes: (click to enlarge and read charts)

Here, the RSI significantly broke below the critical 30 level about a month before the intense late 2002 selloff while the market was still in a fairly mild decline. The next episode:

This was in front (just barely) of the strong August 2007 selloff. This was right at the start of our present bear market before it got very bad. The lead groups were rolling over and were just starting to trade mostly below the 140. The third episode:

This was very similar to the mid 2002 episode with the sub 30 dip occurring a month in front of the main drop. Oh, and there is a fourth episode of this warning signal:

Yes, it's happening now. This rare signal is speaking again. What is it saying? Get out of Dodge.


  1. The RSI of the % above the 50 dma seems to be a better indicator than the indicator itself. Why is that?

  2. You'd think the oversold RSI condition would be more evident at the wild bottoms of those sell-offs instead of at the tamer part. Really screwy!

  3. pam, I don't really know. Maybe it has something to do with the fact that this is charting all stocks in the NYSE, not just the big, stable ones in the major indexes. Small, more volatile stocks seem to start trend changes a little earlier than the big ones. Maybe when something starts to be discounted, it causes a kind of pre-shock rumble which avalanches a lot of the smaller stocks down through their 50 dma all at once, making the RSI a kind of 2nd derivative early warning. Just daydreaming, pam. I don't know.

  4. Quite a find. The lag can be 4 months. 10-20% ups and downs...