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The DJIA's RSI Divergence

12/05/08 09:06:53 AM
by James Kupfer

The DJIA and other major equity indexes appear to be forming a bullish RSI divergence.

Security:   DJIA
Position:   Accumulate

The relative strength index (RSI) is a gauge of the strength of a stock's price action. As with many other indicators, the RSI normally matches the price movement of the security that it is being used to analyze. When prices go up, forming higher highs and lower lows, the RSI normally does as well.

When the RSI and price diverge, it can be a sign that a stock is stronger or weaker than it might otherwise appear. Such is the case now with the Dow Jones 30 and other major equity markets. The Dow Jones Industrial Average (DJIA) has recently made a series of lower lows, but the RSI is actually moving up. As can be seen in Figure 1, prices are moving down beneath the blue trendline. In the bottom pane, the RSI can be seen to be moving up above the green line.

FIGURE 1: DJIA, DAILY. The Dow Jones 30 is making new lows while the RSI is moving up.
Graphic provided by: Wealth-lab.
This bullish divergence is a sign of underlying strength in the market. If the RSI continues to move up, especially if it breaks above the red line at 53, look for prices to follow.

James Kupfer

Mr. Kupfer is a market professional and amateur stock market commentator. Disclosure: It is likely that Mr. Kupfer has or will enter a position in any security he writes about.

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Date: 12/09/08Rank: 4Comment: 

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