Technical stock market update: The Relative Strength Index (RSI) is a popular momentum oscillator of price changes developed in 1978 to indicate overbought and oversold conditions. Our preferred use of this type of oscillator is when RSI negatively or positively diverges from the underlying stock price. In this example, the benchmark SP 500 Index has edged slightly higher for weeks while RSI has moved lower. The last time this occurred without a 3% or larger correction was the 16 trading day period from April 16th to May 7th. We are currently 13 days through an even more compressed period where RSI has negatively diverged from stock prices. It’s likely this pattern will create a price climax between now and August 18th leading to at least a several day correction of more than 4%.
The strong Bull market in Tech stocks as shown by the Nasdaq exhibits the same warning of a necessary price correction to relieve overbought extremes.
A deeper correction would be called for should Call option traders move back to their early July penchant for Buying, but not at this time.