Technical Analysis FOR Long Term Market SWINGS AND TREND CHANGES Using RSI MACD and Moving Averages

Below are the indicators and trend analysis techniques I monitor to tell me when trend changes are on the cards.

MACD Divergence from Price Action

(To learn more about indicators click here.)

The longer time frame MACD indicator gives us a decent start about where momentum is heading. Bullish momentum (higher low on the MACD signal) with divergence from lowering price action indicates a reversal to the upside. (Note the long red line at the bottom of the image is hiding the lowest low on the MACD signal line)

The same applies to a reversal to the downside... a warning sign to exit an asset class (or reduce a position size to reduce risk)...

It is vitally important to combine the MACD with other indicators (see RSI below) as there is often a notable 'lag' between the price momentum change that the MACD is signalling, and the actual movement in price to the downside or upside on the more secular timeframe as can be seen below ... 

... and the 'divergence' of the MACD peaks/troughs with the price action peaks and troughs (as shown below) increase the probability of the price action momentum shifting to the direction of the divergence ...

Longer Term RSI Buy/Sell Signals

The RSI is actually a pretty strong indicator to show when markets are about to go into reverse or take off again. The indicator is particularly strong when there is 'divergence' between the direction of the RSI line and the actual price action. History shows that price action will mostly start to follow the direction of the RSI line...

The long term weekly chart below illustrates how to identify the trend reversal on the S&P500 after the Dot com crash at the turn of the century. The green line at the bottom on the RSI, clearly shows the longer term divergence we are looking for...

The weekly S&P500 chart RSI should show bullish divergence at the start of a trend reversal from bear/downtrend to bull/uptrend...

Use RSI to Optimise 'Dollar Cost Averaging' (DCA) ?

Dollar Cost Averaging is how most peoples pension funds are invested whereby purchases in the stock market and/or bond markets are made on a regular basis with no consideration as to whether or not it is a optimum time to invest. However, if you were to, for example, hold back a 'DCA' purchase after an RSI high of 73 has been reached, and make that purchase after the first pullback from that RSI high, you would be buying the market at a discounted price each time.

The medium term S&P500 chart below (2 to 3 years) shows this quite clearly. The lower RSI indicator on the chart shows 4 or 5 years of RSI readings in the daily S&P 500. When it gets to 70 (see scale in the R.H.S of the chart) it is considered to be overbought. But when it gets to just above that... 73, you see the subsequent declines in the S&P500 in the red boxes on the chart.

CHECK YEARLY AND WEEKLY RSI

The chart below shows a yearly SPX chart stretching back to the Great Depression of the late 1920's. The last 2 major busts (DotCom and GFC) induced the huge spike in the RSI. On the right side of the RSI part of the chart the negative divergence with current long term price action of the SP500 (but note that you would need to switch the chart to a logarithmic scale for a chart this long). There is actually another divergence line from the 2000 DotCom bust high to the 2022 peak. This forms a rather ominous longer term RSI divergence pointing to a larger downturn in the future. Whether that plays out in reality remains to be seen...

CHECK LOWER TIMEFRAME RSI

To get further confirmation of price action drop down from the weekly chart to the daily chart RSI to see if there is divergence there also. 

I also combine the standard moving averages with the RSI or further confirmation of price action direction...

Medium to Longer Term Moving Averages

I combine longer term RSI and MACD indicators with long/medium term moving averages to give me a richer picture of the longer to medium term momentum in the price of whichever asset class I am investing in. Whilst technically being 'lagging' indicators, they still provide a probability based guide to the future direction of the price action in a security, asset class or stock. 

THE 50/200 DAY MOVING AVERAGE

When the 50 day MA starts pointing down this is my first mini indicator (or warning sign) that something might be up and we could start heading down. The 50 day MA is pretty similar to the 10 week MA (70 day) so its bit of an earlier  'heads up'.

The 200 day MA is almost the 'gold standard' for medium term investors. Its the 'line in the sand' that when breached cold point to more of a secular down turn if the 'market' does not make a stand at this MA and turn back up. When price action comes down from on high, it tends to bounce off the 200 day MA. 

For a longer term buy signal on a chart, I look for a sustained close above the 200 MDA after price action has been in a longer term downtrend below the 200 MDA. It is well known that for SP500 stock market in the US, the buying machines will kick in when this happens and you get a ‘melt-up’. if the 200MDA is rejected you could see the machines selling and history shows 6 months later that declines are likely.

THE 50/200 WEEK MOVING AVERAGE

The 50 week MA is about double the 200 day MA. I usually switch my 50/200 DMA from the daily chart to the weekly chart to view the longer term perspective. As an indicator timespan for helping to protect against downturns the crossover of the 50 week with the 200 week will be late to the party. I am more interested in looking at the direction of travel for the 50 week MA. Is it pointing up? Then is general the market will be on a medium to longer term upwards drift... and vice-versa. Similar to the 200 DMA, the 50 week MA provides a 'line in the sand', just a deeper line than than the 200 DMA which can help with a longer term 'investor' perspective. 

In general, a bull market will see price action trading above the 200 day MA and 50 week MA. Take the SP500 for example. In a bull market it can be anywhere between 4 or 5 months and 3 to 4 years in between 'bounces' off the 50 week MA. On occasion, the 'bounce' will turn into a 'breach' of the 50 week MA and quite often when that happens, the price action moves down to the 200 week MA. (See the breaks of the purple 50 week MA line in the SP500 chart above for examples of this). It should be noted that the breach of the 50 week MA does not automatically mean the the 200 week MA will be touched. It could get halfway towards the 200 and then resume an upwards trajectory, so we just have to aware that we are between to 50 and 200 and need to monitor the situation.

This happened in the 2018 'correction' and the 2020 Covid 'flash crash'. But, as per usual, long term investors benefitted by doing nothing. 

THE 200 WEEK MOVING AVERAGE vs 200 DAY MOVING AVERAGE

The US S&P500 chart below plotted against the 200 week MA in blue is an often quoted longer term barometer for long term investors. Apart from the 2020 Coronavirus crash which is an anomaly, the only two long term 'secular' bear markets since the early 90's are clear to see. Even the 2022 bear market correction bounced off the 200 week MA so didn't qualify as a 'secular' bear market.

As can be seen below, the 200 day MA would have signalled an 'investor level' opportunity when the 50 day MA crossed down through the 200 day MA, to deallocate or take longer term profits from the previous bull market in the SP500 caused by the post-covid stimulus by central banks and governments...

200 WEEK RSI BEAR MARKET INDICATOR

The 200 week RSI has shown itself to be a good indicator to warn of an impending secular bear market. The chart below highlights the midway points of the 2001 DotCom crash and the 2008 GFC where the RSI continued it down trend to confirm a secular multi-year bear market in the SP500. The more recent market low in 2023 is highlighted in green on the right hand side. This is the point in that particular downturn where everyone thought that we were enduring another secular bear market, but the RSI continued to trend up as well as the 200 week MA acting as support. This is very different to what is highlighted on the left hand side for the two 'real' bear markets.

Weekly RSI Above/Below 50 & the Stochastic RSI

When the weekly RIS breaks down below 50 it's a bearish signal. Combine this with the Stochastic RSI breaking down to about 0.2 and as you can see in the yellow boxes in the chart below, its a recipe for a downturn...

RSI Trends are a very good indicator of market trends

The US small Caps sector ETF fund chart below demonstrates the usefulness of the RSI to discern uptrends, downtrends and sideways price action. 

• When the RSI is using 50 as 'support', bouncing off it from above, that market is usually in an uptrend of some form. 

• When the RSI is using 50 as 'resistance', bouncing off it from below, that market is usually in an downtrend of some form. 

• When the RSI is oscilating around 50, that market is usually in a sideways phase. 

200 DAY MOVING AVERAGE CHANGE OF TREND

The 200 day MA was a good marker for the Great Financial Crisis (GFC) 2007-2009 bear market as can be seen below. A break above the 200 day MA after a downturn is a decent indication of a change of trend and will also usually be accompanied by some kind of driving positive fundamental force such as central banks injecting large amounts of liquidity. The combination of this technical indicator and fundamental analysis gives us a decent probability to call out a new bull market and start allocating assets accordingly...

Longer Term Moving Averages Indicate 'Real' Secular Stagnation

STANDARD LONGER TERM TREND REVERSAL

Breaches of the 45, 55, and 70 Month MA shows real stagnation in the SP500. This is also matched by the long term Chande Trend Meter breaching below 50. (See highlighted area's of the chart below...)

The above is discernibly different from the 1950's and 1960's below when the longer term MA's were not breached and the Chande Trend Meter held support at the 50 level. As can be seen in the charts below, the DotCom crash and the GFC look more like the stagnation chart above whereas the more recent charts don't...

The longer term secular market drift upwards from the 1950's shows just the 4 major interruptions to that trend highlighted in yellow below. The Chande Trend Meter heading below 50 (shown on the CTM chart below) is the real signal that the market drift is running into some kind of problem which could last longer than would be comfortable.

Long period of secular stagnation on the monthly chart below are accompanied by CTM readings of below 50. ...

The RSI 50 MA 20 signal - An SP500 Bear Market Signal Case Study: 2022

This is a double momentum signal when Price Action moves below 50 on the RSI, and at the same time, below the 20 period MA we then have 2 negative momentum signals. (Vice versa for bullish signal). The screen shot below is taken from the SP500 weekly timeframe and marked the start of the 2022 bear market with a 25% correction ensuing...

[1] RSI moves below the broken 50 level halfway point...

[1] At the same time the 20 period MA is beached to the downside. The 20 period MA then starts acting as resistance rather than support...