Examining the 14-day RSI and the 80-day moving average on the SPX
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Bernie Schaeffer Schaeffers Research.com |
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While most of us technical types love to dive into a wide swath of indicators in our attempts to divine market direction, keeping it very simple in your technical analysis can often yield huge benefits. Perhaps the most important of the benefits of simplicity is it can allow you to maintain a much higher level of objectivity, as you can't add yet another indicator to the mix to tilt your conclusion in favor of your biases.
With this in mind, I just completed an analysis of the action in the S&P 500 Index (SPX) based on just two indicators: the 14-day relative strength index (RSI) -- an overbought/oversold indicator -- and the 80-day moving average (a trend-following indicator that I favor over the 50-day that's in most technicians' tool boxes). Here's what I conclude:
- 14-day RSI – The S&P reached its most overbought level on the accompanying chart (which goes back to October 2007) on Aug. 4, 2009, at 75 – also note that until July 2009 there were no overbought readings on the chart that reached 70. The S&P then rallied by another 5% or so, and reached another overbought peak on Sept. 17 (shy of the Aug. 4 peak) that could be viewed as a non-confirmation. The current reading of 54 is in no-man's land, but it could become interesting as a potential buying opportunity if it gets down to 40 again.
- 80-day moving average (green) – This has been a very significant trendline for the past 15 months, and most recently (early July), there was a successful test on a market pullback. The 80-day is about 6% below current levels at 976. We could be setting up in the next week or two for a test of the 80-day near the 1,000 mark, and given the very skeptical sentiment backdrop, I'd expect this round-number test to be successful and for it to represent a buying opportunity.
Based 100% on what I see from these two indicators, I would have a neutral short-term posture, with perhaps a modest bearish bias, but with the potential for a setup for a major buying opportunity on weakness. Longer-term investors should not disturb their bullish positions based on this analysis, as I see downside risk as relatively minor and a further correction as far from a sure thing.
Bernie Schaeffer:
• Developed Expectational Analysis®, a proprietary, three-tiered method of options analysis combining technical and fundamental studies with the analysis of investor sentiment.
Publisher
• In 1981, Bernie launched the newsletter, Bernie Schaeffer’s Option Advisor. Serving as senior editor since inception, Bernie has led the Option Advisor to become the nation’s leading options newsletter. Features: market commentary, specific trade recommendations, and trading strategy.
• Launched SchaeffersResearch.com, in 1997. A four-time winner of Forbes “Best of the Web” award, the website has also received positive mention in Barron’s, AAII and The Wall Street Journal Guide to Online Investing - “An independent options site that is one of the best for providing primers for both novice and advanced investors.” Features tools, quotes, data, commentary, and education.
• 10 Days to Successful Options TradingSM – This multi-media home study program teaches options basics. Learn fundamental strategies with hands-on application exercises and examples.
Author
• The Option Advisor: Wealth-Building Techniques Using Equity and Index Options (1997)
• New Thinking in Technical Analysis: Trading Models from the Masters – The industry has viewed Bernie’s Expectational Analysis® methodology as a groundbreaking approach to trading. Proof of this came with the publication of this new book by Bloomberg Press. One of twelve authors, Bernie was honored to be chosen from hundreds of market analysts to explain his methodology.
• Writes a monthly options column for Bloomberg Personal Finance magazine.
• Multexinvestor.com regularly calls on Bernie to contribute to their “Analyst Corner.”
Awards and Recognition
• Three time winner of The Wall Street Journal stock picking contest.
• Ranks fifth among market timers tracked by Timer Digest for the past decade.
• Dick Davis Hall of Fame inductee for his bearish posture ahead of the 1987 crash.
• He is known for successfully maintaining a bullish market posture throughout the 1990s.
• The Market Technician’s Association (MTA) awarded Bernie “Best of the Best” in 1997 in the field of Sentiment/Psychological Analysis.
• Bernie is regularly featured on investment chats on Yahoo! Finance.
• Bernie’s views on the stock market and the economy are regularly quoted in The Wall Street Journal, The New York Times, BusinessWeek, Investor’s Business Daily, and USA Today.
• Both Barron’s and The New York Times have featured Bernie in “Question & Answer” interviews.
• Recognized as a CNBC “Market Maven.”
• Appears regularly on national financial broadcasts such as CNBC, CNN, Bloomberg Television, the Nightly Business Report, Wall Street Week with Fortune and Fox News. Also serves as a guest host on CNNfn.
• Frequently invited to speak at national investment conferences and seminars.
• Regularly sits on Options Industry Council panels around the country.
• One of 50 market strategists appearing in BusinessWeek’s 2001 market forecast.