What Can the NYA New Lows vs. the S&Ps Relative Strength Tell You About the Market?
We have discussed the NYA "New Daily Lows" vs. the market many times before. Basically, when New Lows fall to below 50 to 28 per day, the market faces a condition where investors have pretty much stopped the big selling and have decided to hold on to the stocks they are still in.
In the top graph of the chart below, I drew a horizontal red line at a level of 50 or below on the NYA New Daily Lows. By observing the times the New Lows were below this line, and looking at the SPY's price chart, you can see that the market stops going down at these levels.
But sometimes, at 50 or below on New Lows, the market goes sideways and other times it goes up.
Why is that, and what determines which will happen?
The answer to the question resides in what is going on with the 30 RSI on the SPY or S&P 500.
The relationship is pretty straight forward ...
1. If the NYA New Lows are below 50 and the zero-based RSI is Negative, then the S&P moves in a sideways trading range.
2. If the NYA New Lows are below 50 and the zero-based RSI is Positive, then the S&P moves up in a rally like we saw in March to May of this year.
I know you are wondering ... what is a Zero-based (RSI) Relative Strength Index?
The answer: A normal RSI range is from 0 to 100. A level of 50 is neutral with 55+ having a decided advantage, and a level of 45- has a decided disadvantage. In the charts that we show on our paid subscriber site, we Zero-base the RSI. What that means is, that I have written a short program that takes the current value and subtracts 50. Therefore a traditional RSI of 50 becomes Zero or neutral on our RSI indicator. If our RSI moves to 55, you can clearly see it is positive. Why to we do this? Because it needs no interpretation and requires no double checking of what the RSI number is at any point in time ... in other words, it is investor friendly.
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