The SP500 right now on the daily chart is clearly in the ‘red zone’ or the ‘power zone’ if you will. This zone is the one often referred to by technical analysts as the zone above the 70 level on the 14 day RSI Index (Relative Strength Index). The relative strength index is a simple indicator that measures any securities overbought or oversold level.
The reading on the RSI Index for the SP500 close today was 78.3 according to my chart data but that value may be slightly different depending on the charting source or quality of price data.
The reading on October 26, 2006 was 79.81 and the reading on January 8th, 2004 was 78.98. After the 79.81 reading in 2006, the SP500 went into a 3 day decline of about 15 SP500 points, but thereafter went on to run higher again for 8 more trading days which marked the final high price. However that ‘final’ high price was TESTED two more times (which took about a month and a half) before the market finally rolled over more seriously on March 8th, 2004. After the March 8th, 2004 high, the market went into a sloppy sideways correction for 6 full months.
After the October 26, 2006 high RSI value the market right away went into a decline of 30 SP500 points but then went on to rally for 4 more months before the next more severe correction.
So the bottom line ?
The bottom line is that a super high RSI reading by itself is not a reason to indicate a final market top. It can mark a pausing point and intermediate high in the market.
The much better signal is to wait for the RSI to cross back below the 70 level after having bounced around above that range for several days (or even weeks).