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Wednesday, July 29, 2009

Weekly RSI Channel

Quite a rally indeed for Primary Wave 2. Sentiment is shifting back toward bullishness. I expect bullishness to challenge the highest highs of the 2003-2007 rally. But sentiment cannot mark the top, it only helps confirm where you are at in the wave count.

One thing I regularly tracked toward the final months of P1 was the P1 RSI down channel. I predicted it would diverge and indeed it did by quite a lot.

P2 has now rallied long enough to form its own RSI up channel and it is tighter than P1's down channel. To me that is not unexpected and confirms the sharpness of the rally. As much as I was rushing p2 early in June, I must admit, I was wrong to rush things. If P3 is to come, it should start from a proper RSI mark that is high enough not only on the daily and weekly, but monthly as well. I suppose its a basic TA tenet that all major turns display negative or positive divergence in some form or another at the weekly level at least. If there is one turn over the last 100 years that doesn't its just that I haven't looked hehe.

From an EW standpoint that totally makes sense as the subwaves or wave 5's are supposed to be weaker than previous subwaves in strength. That weakness that often marks tops are reflected in the RSI.

So I have thrown together my first P2 RSI up channel chart. What will mark the top of P2? When we start to see negative divergence on the weekly. I am convinced now we will. I shouldn't have ignored this suspicion but I will no longer.

It may be that the negative divergence is very small but it will be noticeable nonetheless. If your a fund manager or just a trader, and you see a small smidgen (yet clear) of weekly negative divergence on this total disbelief rally with fundamentals and the state of national debt in such precarious shape, what would you do? Bet on more upside? Or get the hell out?
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