Call it the debt ceiling debate, the European mess, the U.S. economy or a combination of all three, whatever it is, the markets have technically broken down. This week all of the key indices have broke below their respective 200-day moving averages. Let’s take a look at the Dow (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart).
So what now? Although the 200-day has been violated in each of the key indexes, and technically speaking this is a bearish event, let’s now turn our attention to the Relative Strength Index or RSI. Certain market technicians utilize both the moving averages and RSI to evaluate current market conditions. The case with the RSI is whether or not an index or a security has become overbought or oversold. Looking at the charts of the key indexes, they all have now broken below the 30 value level which is the level that indicates that a security or index is becoming oversold according to the RSI metric. This doesn’t mean to go out immediately and go long this market for stocks or indexes can remain oversold or overbought for extended periods of time. However, what this does mean is historically when the RSI value breaks below 30 (oversold) or above 70 (overbought) a reversal of the trend typically occurs at some point and time.
Remember technical analysis can be a useful tool when evaluting markets, however, fundamentals and the macro environment is what typically drives the markets and looking at where we are today the markets are not very happy with the picture.