My last flurry of posts was back in May, when I was discussing a negative divergence that had formed on the Relative Strength Index. We discussed at that time the bearishness that this divergence suggested. The initial area of support that I suggested was at 1375 on the S&P 500. We did see the markets bounce around at that level before beginning the downward trend that has persisted ever since. This downward trend has been longer in time and magnitude than I originally anticipated, but I believe it is coming to an end.
The chart above shows that as the price of the S&P 500 continued to make a series of lower lows into the month of July, the Relative Strength Index (RSI) began making a series of higher lows. This created a bullish divergence, and suggested that the downward trend had lost its momentum. When the RSI made a higher high as the equity market rallied this week, a failure swing was complete that suggests an upward trend will develop. It was this development, along with bullish indication on other technical measures, that prompted me to close the majority of my short positions and assume a bullish posture.
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