Getting Technical With “Green-Tinted” Signals

On St. Patrick’s Day, which has been a historically strong day for equities, we wanted to take a look at another “green” indicator.

The price level of the S&P 500 Index continues to flirt with its all-time high “green” level recorded on March 1, 2017 at 2395. Since then, the index has been operating in a 1% range—a typical sideways consolidation pattern bound by support at 2365 and resistance at 2395. Does this pattern suggest that equities are exhausted and cannot move higher? To answer this question, let’s look at the “green-tinted” RSI 14, which shows us price breakouts and suggests whether further momentum is likely.  (The Relative Strength Index 14 [RSI 14] is a technical momentum indicator that compares the magnitude of recent gains with recent losses in an attempt to determine overbought and oversold conditions of an asset over a period of 14 days.) A RSI (14) reading above 70 is considered overbought; below 30 is considered oversold.  When the index price and its RSI (14) indicator both make new highs, this is often a bullish sign.  When the S&P 500 made its new all-time high at 2395 on March 1, it also made a higher high on its RSI (14) indicator at 81.7—signaling strong momentum for stocks.

We take a closer look at this bullish confirmation scenario, with historical data, in the table below, and note the 15 times it occurred since 2009 (i.e., the beginning of the most recent secular bull trend).  Three months later the S&P 500 was higher 79% of the time with an average total return of 2.12%. Going out six months, the returns are higher 93% of the time with an average total return of 7.0%. Looking out over the longer term at 12 months, the returns were higher 100% of the time with an average total return of 11.78%.

We are encouraged by our RSI (14) and S&P 500 analysis, which suggests that based on the current environment, stocks may have an increased likelihood to continue to climb in 2017. As always, LPL Research will keep you posted on technical trends to watch.



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