This post is a follow up to the analysis of quarterly chart RSI peaks from a few weeks ago. Today I'm looking at the monthly version.
The chart below goes back to 1915. Yes I know it is hard to see the price. I'll zoom into the specific incidences soon enough. The point is that RSI is in historically rare territory and we want to examine what has happened in the past when it has been up at these levels.
1925
1928-29
1945
1955
1959
1986-87
1996-97
2017
1925-29
The first of these was a momentum high that was enough to pause the market for several months. The index went fractionally above but did not close higher; and a -16% drop to near support followed. After that, parabolic move began.
There was a cluster of months in 1928 when the monthly RSI was at today's level or higher; 3 months powered higher, then a 5 month sideways pullback, before a zoom to the final top. There was a -13% decline before the real trouble began. I think something similar 'should' be the case today. There was some divergence on the final high via Bollinger bands but RSI was not glaring and the decline was rather sudden, crashing -49% in just 3 months.
Note the later highs in 1936 reached 80 but not 82+ of today.
1945
Similar to 1925, the first high was not 'it' but a few months later a bit higher high in price with notably lower high in RSI was followed by a -25% drop over 6 months that then had to stabilize for more than 2.5 years before another rally took off.
1955 & 1959
This was the nicest RSI peaks. 1955 went steadily higher for another year before putting in a clear RSI divergence high shown at the slanted red arrows.
1959 had a high retest before a drop of -17% into 1960.
Note the high that really mattered in 1966 happened with much lower RSI.
1986-87
Like the late 20s, 1986 had a series of months above current RSI level but most of the gains were in before a sideways period & pullback, then another massive trust to the top. That red bar in 9/1986 was a -10% pullback, something we have not seen in 20 months!
1987 really did come out of the blue and while indexes faded back inside the BB I would not have guessed that a single 1 day drop of -20% was on the way.
1996-97
This was an amazing move as the first RSI above 82 was just 1 year into the run! While I doubt we are in the same scenario i could be wrong. There was a lengthy topping process with all kinds of crystal clear divergence on the 2000 top. But now that everyone is looking for a top like this it may not play out in the same way.
2017
What is the next move? While this could go higher by a few or several bars, the more likely move according to history is a slowing of the pace, some pullback, then a higher high or at least a high test with RSI divergence. No divergence means no worry and no premature top picking just yet, even though i do think YR2 is the place for some pause this quarter.
The only thing that bothers me with this idea is that now everyone is looking for a topping process like 2000 or 2007. Who knows, the market may be kind enough to give us a year of stall before a truly painful drop, but at the same time, given algos that are now in charge, we may see something rather sudden at some point down the line.
The point with the two red horizontal lines is that the post election move was not really about Trump but the blast off above the 2015 highs which had stalled the market for quite some time and had started to look like resistance. From that breakout a massive one way move has followed.
