Déjà Vu All Over Again in Momentum
- Posted by JC Parets
- on June 8th, 2012
One of the great philosophers of our time,Yogi Berra, used to watch Mickey Mantle and Roger Maris repeatedly hit back-to-back home runs for the Yankees in the early 60s. This is where the phrase, “It’s déjà vu all over again”, originally came from.
I love that Yogi’s reference is relevant in today’s stock market, and I get to quote a legend. We’re seeing the stock market and momentum behave in a very similar way that marked an important bottom last year. When the S&P500 made new lows this past October, the Relative Strength Index did not. RSI was putting in a higher low, which is a bullish divergence. Sure enough, the S&P500 rallied 30% into the first quarter and the Russell2000 ripped 40% higher.
I’ve noticed that with the recent lows in the S&P500, RSI was again putting in a higher low – just like last year:
And I’m not the only one who noticed. A few other technicians are watching the same action. From Bloomberg:
“While the benchmark measure (S&P500) sank June 1 to the lowest level since January, its 14-day relative strength index, which measures the degree to which gains and losses outpace each other, reached 28.5, staying above a low of 23.2 reached on May 18, according to data compiled by Bloomberg. Last year, the S&P 500 dipped on Oct. 3 to a level not seen since September 2010, with the RSI holding above its August low. The index then surged by 29 percent over the next six months.
‘This divergence highlights that sellers are losing momentum and control,’ Joshua Dollinger, chief quantitative and technical strategist at BTIG LLC in New York, wrote in an e- mail. The ‘signals certainly make a compelling case to be long’ over the next six weeks, he said.”
Richard Ross, global technical strategist at Auerbach Grayson & Co., said the retreat may have run its course:
“The false breakdown beneath the 200-day moving average provided a fitting capstone to the textbook 10 percent correction, which has set the stage for a sustainable summer surge,” Ross, based in New York, wrote in a note yesterday. “The bullish RSI divergence reinforces our belief that prices should push out through 1,340 and retest 1,400. A fresh new high above 1,420 must now be considered.”
On Oct. 3, 2011, when the S&P500 reached the year’s low of 1,099.23, the RSI fell to 36.2, holding above a low of 16.5 reached on Aug. 8, according to data compiled by Bloomberg. The index then rallied for the next two quarters before the advance stalled at 1,419.04 on April 2 this year.
It’s déjà vu all over again, right Yogi?
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is a member of the Market Technicians Association. More
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