Failure Swing Follows Divergence in Weekly RSI of NASDAQ100
There was another bearish indicator for the NASDAQ100 (and equities in general) signaled this past week by the weekly RSI.
In case you are not familiar with the Relative Strength Index (RSI), it measures a stock or index’s strength relative to its own price history. This is different than the more general use of the term “relative strength”, which refers to the measurement of a stock or index relative to another stock or index,usually the SP500.
In its basic use as an overbought and oversold indicator, the overbought level is above 70 and the oversold level is below 30. These levels are often adjusted by technicians based on the history of the specific security, the type of market (trending or choppy), and the time frame being traded.
The overbought and oversold signals are most valuable when combined with other RSI signals. One such signal is called the failure swing, which happens when the RSI closes above 70, retraces, then pokes above 70 again but doesn’t take out the old high. The pattern is complete when the lower peak’s trough breaks below the trough following the higher peak. If this occurs while the RSI is diverging from price, as it is in this chart, it’s an even stronger and more reliable signal.
In further study of this weekly chart of the NASDAQ100, it is interesting to note that In the last decade there have only been 3 such occurrences of an RSI divergence above the overbought line followed by a failure swing: December 1999 to March 2000, July to October2007, and September 2009 to the last week of January 2009 (current). Coincidentally, the time elapsed between the peak and turn down is similar also. March 2000 and October 2007 were of course major tops.
More on the RSI: