RSI is Saying Sell! Sell! Sell!

Wall Street Santa StocksA big fundamental index I enjoy watching for overall buying/selling trends in the stock market is the Relative Strength Index (RSI). This index essentially compares the recent gains with recent losses, while factoring in the trading time line and magnitude of momentum. In Wall Street, many look to this index as a an indicator of whether the market is currently overbought or oversold.

Sure, the movement in stock market is purely dependent on the mass trending of traders and has no fundamental dependence whatsoever (as we have seen quite clearly the past year and a half), however, the RSI has remained to be a pretty reliable index for indicating upcoming trends.

An index level passing lower than the 30 mark is usually a strong sign that the market is well oversold, which tends to bring a nice rally in the short future. On the flip side, a movement above the 70 level, is known to fundamental investors that the market is probably overbought for the time being.

For the first time in over 30 days, we just surpassed that key 70 mark, which history shows that indeed a pull back should be in our near future. Sure, we've seen the index go into the 90's before seeing an actual pull back, however, those levels are very rare.

This number combined with the very low volume that accompanies the last couple weeks in December could open the doors for a bit of selling going into 2011. Consumer confidence is what continues to fight the battle upward, but I have to think that even the extra bullish investors are starting to feel the time to pull some chips off the table for the time being. Keep your eyes out. Happy Trading.

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