Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Bearish Monthly RSI Divergence 100% Accuracy Rate; Occurred at 91.6% of Market Tops

Stock-Markets / Stocks Bear Market Jun 10, 2012 - 11:29 AM GMT

By: Steven_Vincent

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleRelative Strength Index is one of the most widely recognized and followed technical indicators. The most common use of RSI is the identification of divergences:

Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements...According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. StockCharts.com


The monthly chart of Dow Jones Industrial Average has registered a bearish divergence at the 2011 and 2012 highs:

I went through the monthly data on INDU going back to 1971. In 100% of occurrences of the signal an average decline of 27.9% lasting an average period of 10.8 months resulted. Since 1971 in all 11 occurances of a bearish monthly RSI divergence a significant decline of at least 16% followed. There was only one top of significance that did not register this signal and that occured in 1973. That means that during a forty year period starting in 1971, 91.6% of all significant tops recorded this technical signal. That is a period that encompasses two bear markets and a major bull market as well, which means there is a firm record of this technical condition resulting in serious bear markets under a wide range of well identified market conditions.

Here's a list of the tops regsitering a monthly RSI divergence and the subsequent percentage decline. Click on the link to see a chart of the occurrence:

YEAR, PERCENT DECLINE, DURATION OF DIVERGENCE, MONTHS OF DECLINE

1976, -28%, 5, 19
1980, -21%, 5, 2
1981, -25%, 4, 17
1983, -17%, 6, 8
1987, -41%, 16, 3
1990, -22%, 10, 4
1997, -16%, 7, 3
1998, -16%, 11, 3
2000, -39%, 8, 34
2007, -54%, 4, 18
2012, -??%, 11, ??
■The average percentage decline is 27.9%

■The average duration of the bearish divergence (difference in the number of months between each price top) is 7.91 months.

■The average numbers of months of the decline is 10.8

■The average monthly decline is 3.58%.

■Removing the outliers of 54% and 16% the average percent decline is 26.13%

■Removing the outliers of a 16 month divergence in 1987 and a 4 month in 1981, the average duration of divergence is 7.4 months.

■Removing the outliers of 34 months and 2 months, the average length of decline is 7.5 months.

The current bearish monthly divergence took 11 months to develop, about 3.5 months longer than average. This is the second longest build to a bearish monthly RSI divergence, the first being the 16 month period leading up to the 1987 top and decline of 41%. The current market is only 5 weeks off the divergent price top or 38 weeks short of the average and the maxium decline to date is about 9.8% or 18.1% less than the average drop. Altogether this suggests the probability of considerable more downside in terms of time and price yet to come in this bear market.

The average percentage retracement following a monthly RSI divergence is 57.6%.

The nearest Fibonacci retracement percentage level of the prior wave which it corrected for each signal is shown:

1976-1978 61.8%

1980 100%

1981-1982 78.6%

1983-1984 38.2%

1987 61.8%

1990 50.0%

1997 23.6%

1998 23.6%

2000-2003 38.2%

2007-2009 100%

If this occurance of the Monthly RSI Divergence results in an average retracement it would entail a decline to Dow 9380 or a drop of 26% from current levels and it would bottom in December of 2012 at about 9290.

The usefulness of this signal for identifying major tops which result in an average bear markets of 27% is evident. On its own it would be a powerful cause for investors to evaluate their market position. Since it is accompanied by an extensive raft of other strongly bearish technical indications, it should be taken as an actionable signal.

While a short term, news driven bounce is likely, it should be regarded as the last, best chance for investors to exit the market before a major decline ensues. Front running the announcement of "easing" by global monetary authorities may work for a period ranging from a few days to a month or so but it is likely to be punished severely in the end.

Go here to read the full BullBear Market Report:

Disclosure: No current positions.
By Steve Vincent

http://www.thebullbear.com

Steven Vincent has been studying and trading the markets since 1998 and is a member of the Market Technicians Association. He is proprietor of BullBear Trading which provides market analysis, timing and guidance to subscribers. He focuses intermediate to long term swing trading. When he is not charting and analyzing the markets he teaches yoga and meditation in Los Angeles.

© 2011 Copyright Steven Vincent - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Murray Niederer
11 Jun 12, 17:16
RSI and Bear Markets

Your article on the use of RSI and how it pertains to bear markets has hit the nail on the head for me. It is an excellent and succinct report that has confirmed and rationalised my thoughts on the market. It has also set a range of parameters within which the market has historically operated. I found this article extremely useful and I will bear your analysis in mind while planning my 2012 trading.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in