The Big Picture (with ETF: DIA):This is the DIA weekly. The rally from the March lows has been labeled as an ABC zigzag (Elliott Wave Principle, p. 43). There is symmetry to this labeling because wave A virtually equals wave C. Wave A=24.24 points, and Wave C=24.64. This is a common pattern that emerges when labeling waves, and it gives the chart some continuity. A piece of evidence that the market is near a top is that as DIA continues to trade a little higher, the fast and slow Stochastic fail to confirm that upward direction of the DIA. This is a noticeable negative divergence. Also, as the DIA is near the top, the RSI (14) is only reading 64.20 currently. A stronger reading of over 70 would be more advantageous to confirm the upward direction. For example, the highs of 2004 and 2007 had readings of over 70.
S&P 500 vs. RSI Reading of 70 or higher: This is a chart of the S&P 500 and the percentage of stocks within the S&P 500 with an RSI (14) reading above 70 (source: www.indexindicators.com). This chart was selected because this can be one way of discovering the underlying strength of the market. Notice the huge spikes up in the percentage of stocks within the S&P 500 in May, August, and September. Those spikes also corresponded with higher highs and higher percentages of stocks each time a new high was made. A reading of 70 or more for an RSI (14) is one sign of strength for an individual stock or market. Even though a reading above 70 often marks an overbought condition, it also marks relative strength in the market. The greater percentage of stocks above 70 would mark true strength. When it is lower than 70 and the market makes a new high, this marks a negative divergence. Examine the recent highs in the S&P 500 and the percentage of stocks with an RSI (14) above 70. The percentage of stocks with a 70 reading is dramatically less than the other spikes, and yet the market is making new highs. This divergence demonstrates weakness in the market.