RSI Waning In France's CAC 40

11/10/05 07:44:38 AM

by Arthur Hill

The CAC 40 is losing momentum as a bearish reversal pattern takes shape.

Security: $FCHI
Position: Hold

The CAC 40 is losing momentum. First, let's look at the relative strength index (RSI) and momentum. This momentum oscillator fluctuates between zero and 100. In an uptrend, the indicator often becomes overbought (>70) and rarely reaches oversold levels (<30). Such is the case for the 14-day RSI on the French CAC 40 (Figure 1). The indicator moved above 70 at least five times this year and never moved below 30. In fact, the 35-40 area acted as support in April, August, and October.

FIGURE 1: CAC 40. The French index appears to be trending lower.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Even though RSI bounced off support in October, it has yet to exceed its prior highs, and a negative divergence formed from August to October. As this label implies, the negative divergence is, well, negative. However, it is only negative as long as the red trendline holds. Note that RSI formed a negative divergence in March-April, and this failed to herald a big trend reversal. The subsequent break above the negative divergence line in May marked a return of the bulls (green circle). Similarly, a break above the current negative divergence line would mark a return of the bulls (gray oval).

As long as momentum is trending lower, I am keeping my eye on a potentially bearish head & shoulders pattern. The shoulder formed in August and the head in October, and the right shoulder is under construction. A move below neckline support at 4300 would be most bearish and project further weakness toward 4000. I would also look for RSI to move below 35 to confirm such a support break. Otherwise, look for RSI to move back above 62 for the bulls to step back into the picture.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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