In this post I am going to explore RSI peaks on the quarterly charts for INDU, or Dow Industrials. TradingView data goes back to 1914 with RSIs kicking in 1918 on the quarterly chart. Red line is drawn at the current level.
Sum
Both 1929 and 1987 tops were followed by violent drops that came rather suddenly, with little warning or time. However, both moves had rallied much more excessively than today.
1954 RSI peak didn't have a high that really mattered until 1961, and even that after a drop was followed by another rally to higher highs in 1965. Similarly, the 1999 top gave plenty of warnings through RSI divergence and a nice long period to see distribution to get out.
Sudden top and sharp drop, or gradual slowdown in momentum and time before rolling over? So far we don't have the excesses of 1929 or 1987 in RSI terms, nor do we have any slowdown or divergence in RSI. We only have four examples but I think the conclusion is to remain bullish until we see more excess (RSI 85+) or RSI slowdown & divergence.
Quarterly RSI values have exceeded the current level in:
1927-29
1954-56
1986-87
1995-99
3 out of 4 of these are rather glaring tops at the end, so let's explore them all in more detail.
1927-29
This amazing run accelerated with the move above the 1925-26 sideways period in 1927. From 1927 Q3, 7 of 9 bars closed outside the Bollinger Band (BB) before the massive drop. RSI reached a peak of 91 on the top.
The current environment while impressive is nowhere near the excesses of 1927-29. But let's file that for other indexes - Q chart RSI 90 is a potential sell.
That said when 1929 came apart it was in a massive way - if i see a candle like 1929 Q3, i will be OUT and probably short.
1954-56
This is a lot more comforting because even though the RSI peak was 1956 Q1 that was just the first in a series of higher highs. There was a sideways period and pullback to 1957 Q4, anther rally to 1959 and 1961 highs, and sharper drop to 1962 lows, then another strong rally to 1965-66 highs. These were the highs that mattered as ~15 years of sideways followed.
If only the current environment would play out like this... we can sleep comfortably until we see a noticeable divergence top, ideally both on RSIs and Bollinger bands such as 1961 Q4 with RSI merely 71 and the highs all inside the BB compared to prior two peaks. These are highlighted by the red arrows on price and RSI in the chart below.
But it is not inconceivable that the current move could end like 1962 - a sudden drop out of the blue.
1986-87
The power move really began in 1985 Q2, with the jump above the prior 1983 highs, but RSI was still only 68 then. From 1985 Q4 6 bars out of 8 closed outside the Q BB before the massive drop.
The worrisome point about this chart is no warning like 1929 or 1961; out of the blue, higher highs in RSI, a mild wick but nothing that screamed sell.
1995-99
Q chart RSI was an amazingly above 90 from 1996 Q2 to 1998 Q2, before a sudden shakeout during 1998. Also note how many quarterly bars were closing outside the BB - a run of 10 in a row from 1995 Q2 to 1997 Q3, a pause, then one more in 1998 Q1.
I like the 2000 top, and probably everyone does. Crystal clear divergence. A nice long time to get out. Plenty of warnings and time.
2017
