davidshanhun
Short

RSI divergence since MAY 2013 until now on SPY

AMEX:SPY   SPDR S&P 500 ETF
111 2 0
We have had many pullbacks on the SPY             and still it has stuck with it's long term Bull trend. The RSI has been showing fundamentally it is getting weaker internally, and todays pull back could be the start of a change of trend.

As you can see before though - the SPY             has had divergence with the RSI now since May 2013, and has still rebounded to stick with it's long term up trend.

So... is this a dip again, or the trend reversal the RSI is hinting at for over a year...
What does 'the RSI has been showing fundamentally it is getting weaker internally'?
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davidshanhun vlad.adrian
2 years ago
the RSI compares recent gains to recent losses and tracks them. This means that if they both have equal weighting the RSI will essentially mimic the stock chart - which is what normally/typically happens. What I mean when I say that the SPY is getting weaker internally is this... I'll use an analogy if I may - it's a little long winded but I find it the easiest way to explain... (I am not referring to fundamental analysis at all by the way here).

Imagine a construction team is building a tower. There are 40 people on the job all with different roles to make the structure secure and stable. The workers are the RSI. The height of the tower that they are building is the stock chart. Monday to Friday the workers all show up and a bit more height is added to the tower - the tower (stock chart) goes up, and each day the number of workers that showed up are added up (RSI), and this chart goes up also. On Sat and Sun the workers take the weekend off (RSI stays flat), and the tower also doesn't gain any height (stock chart stays flat).

What happens when some of the workers start not showing up Mon-Fri is this... The tower height may still be increasing - some of the workers are still going and doing some work - but perhaps some of the guys that should be welding support beams aren't there - so the tower keeps gaining height (stock chart), but there are some crucial support beams that are not in place in the structure (RSI going down or not gaining at the same level/speed as the tower is showing missing workers). Here is where the RSI is awesome - it is showing us that some of those workers haven't been turning up - so we aren't sure what - but something is amiss.... even though the stock/tower is climbing/getting higher.

Personally I use the RSI on the daily for short term entry points - it has an exceedingly high accuracy in my experience of a change. Well worth the time to back test on a daily chart. I'll add the daily chart on the SPY to this comment. The two combined were a powerful indicator of yesterdays move.

Short on SPY using daily chart and RSI divergence
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