What is the Relative Strength Index (RSI) Technical Indicator?

We utilize the relative strength indicator ubiquitously in our work, whether it be analysis of the stock markets in general, or analysis of individual stocks and ETFs. So, for the benefit of newcomers and technical analysis beginners, here's a refresher on RSI.

Introduction

The Relative Strength Index, which is generally referred to as "RSI" (so as not to be confused with the "Relative Strength" concept utilized in other arenas of investment management), is a creation of J. Welles Wilder and was introduced in his book titled "New Concepts in Technical Trading Systems".

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Negative Divergences Abound on the Hourly Charts

The hourly chart of the S&P-500 is showing several potential negative divergences on RSI and MACD. Will these potential signals get confirmed and lead to a small sell-off? Or will the bulls find a way to nullify these signals and carry on their merry way?

If the negative divergences do end up being confirmed, a move to the 752-766 area might be possible, although we'll have to use the momentum indicators as well as other levels on the daily charts in order to arrive at a more solid target.

S&P-500 hourly chart showing negative divergences on RSI and MACD

Hourly Chart of S&P-500

The markets have had a great start to the day. Many are showing gains of greater than 3%. Will the gains hold? You may want to take a look at a few developments on the hourly chart of the S&P-500...

The bullish signs (but):

A potential positive divergence on MACD, which we'd first shown you a couple of days ago. The big test comes today, however. We've extended a line from the middle peak of the divergence; now, MACD has to move and stay above the "confirmation line" in order to complete the positive divergence. If MACD is not above that line, the positive divergence has to be seen as incomplete or even as having failed.

RSI has moved above its centerline. However, if you notice, that has been a reason to sell in the recent past. As long as RSI stays above its centerline, the bulls will be in charge of the short-term trend. If it falls below, we could see the beginning of the next downwards leg.

The bearish signs:

The index has smashed up against the upper bollinger band on the hourly chart. That band is flat to slightly rising at the moment. It needs to start to rise sharply or else the bounce will fail.

Final Comments:

So, there are a few countervailing factors and traders will have to weigh them against each other. The lack of a final selling climax does worry a few traders; we are amongst that list. A handful of analysts have claimed that a selling climax is not necessary and that the steady drip of the past several weeks can be seen as a process of capitulation (that is complete). They may be right. Who knows? We'll soon find out.

And, for what it's worth, Mark Haines (CNBC show host) has said several times this morning "this is the bottom." Okay!