RSI Negative Divergence: Possible Market Pullback (SPY, QQQ)

UNDERLYING PRINCIPLE:

Divergence between Futures/Stocks/ETFs and their Relative Strength Index (RSI) can be used to predict a bottom or a top. This method is more useful in determining a reversal in overall market than an individual stock. To elaborate the principle let's assume the market is making higher highs but corresponding RSI is making lower highs. Together this uptrend in the market and downtrend in RSI show that the market is losing strength as it is climbing up. Which essentially implies a reversal/pullback in the market.

The same principle can also be applied in determining a possible bottom in the market. Say if the market is making lower lows and corresponding RSI is making higher lows. In that case we can expect an upward reversal of the market.

Current Scenario: Possible Pullback

To inspect the current market I used weekly and daily charts for Nasdaq and S&P 500 ETFs QQQ and SPY .



In QQQ weekly the negative divergence is eminent as the ETF is making higher high but the RSI is making lower high. If we zoom further into a daily setup then the same negative divergence can be spotted:



For SPY on the other hand no divergence can be observed on a weekly setup:



But on a daily setup a Negative Divergence can be detected:



Recent History: Bear Market Bottom
As you can see in both weekly charts, the recent bear market bottom has been identified using the same method: A Positive Divergence.

Thanks for reading.