We’ve been following a forecast that combines a proven analog, several major price channels and some important harmonic patterns.  One interesting aspect we haven’t looked at for a while are the RSI channels.

Like price movements, I’ve found that the market’s RSI tends to move in channels, which makes it somewhat predictable. Without getting into why it works, it’s pretty obvious that it often does — although I rarely come across other analysts who use it to the extent that I do.  It’s particularly useful in signaling reversals and breakouts/breakdowns.

Consider SPX’s daily RSI.  The nearly flat big white channel is the one channel that’s contained everything for the past two years.  Note how often we had reversals at the interior channel lines — especially the (dashed) midline.

The rising purple channel has guided the action since 1101 in August 2011.  Within it, we’ve had several well-defined channels that made some of my best forecasts possible.  The falling yellow channel between January and May 2012, for instance, helped construct an analog that enabled me to correctly forecast the drop from 1422 to 1292 and return to 1474 [see: New Analog and Analog Update.]

The rising red channel since 1291 in mid-May, kept us on track to our upside target of 1472 in mid-September, and the overlapping rising white channel helped confirm our decision to short the market at 1474 on Sept 14 [see: The World According to Ben.]

So, when RSI channels whisper in my ear, I listen.  Right now, it’s more of a dull roar.

continued for members…

The red channel from the summer of 2010 guided prices to the 2011 highs.  As is typical, the 1370 high came on negative divergence.  That is, RSI was lower when SPX hit 1370 than it was at 1344 or 1227 (we often use negative divergence as a sign that markets are topping out.)

When that 1370 high has made, it helped establish a falling channel – drawn here in yellow.  But, reaching 1370 finished off another channel — charted below in white.

Prices fell out of that channel around May 13 when SPX broke down and dropped below the previous 1329 low — reaching 1318 on the 17th when RSI hit the channel midline.  At that point, RSI began a back test of the white channel — not once, but twice.

The first time took SPX up to 1347.  When the back-test completed, SPX promptly fell to 1311 (May 25.)  The second back-test reached 1345 (in yellow.) The subsequent sell-off reached 1277 on June 8 (reaching 1258 on June 16 on positive divergence.)

Now, let’s look at the latest top.  It’s bigger by a factor of 2.4-2.5, so the channels don’t have the same slope when compared on the same chart.  And, there’s more detail on the current chart (e.g. we can see the divergence more easily.)

May 2012’s 1291 stands in for Mar 2011’s 1249.

continuing…