As the U.S. economy continues to show signs of improvement, Greece weighs down the world and threatens significant problems that could reverberate around the globe.
“Big Ben” Bernanke and “Super Mario” Draghi of the Federal Reserve and European Central Bank, respectively, continue pumping enormous amounts of liquidity and “free money” into the global financial systems in an attempt to keep markets afloat, but like the epic struggle between the iceberg and The Titanic, the current situation looks more and more like the iceberg is winning.
Greece has missed countless “deadlines” while rioters in the streets say enough of austerity, already. The talks remain stalled while the clock ticks towards the mid-March deadline at which point Greece could go bankrupt and throw the world’s financial system into complete disarray.
So, while fundamentals are troubling, to say the least, the technical indicators are positively terrifying.
Chart courtesy of www.stockcharts.com
In the chart of the S&P 500 above, we see a graphic display of the overbought condition of the RSI. (Relative Strength Indicator) The RSI, now well above 70, which is widely viewed as the “red zone,” we can see how the S&P 500 has reacted with measurable declines at previous points in history when RSI was at levels similar to today. Furthermore, the index is currently at significant resistance, a level which adds additional weight to the thesis that a significant correction could be just around the corner. Today’s resistance levels date back to resistance trend lines from 2011 and then 2008. The failure, thus far, of the index to break to new highs further heightens the possibility of a significant decline. Confirming this potential we see Stochastic moving toward a sell signal and MACD in a relatively flat trajectory.
Bottom Line: The chart above shows us how significant declines from RSI 70 can be, ranging from 5-20%. No one can know how deep the next decline might be, but the likelihood of it occurring grows every day that RSI remains at elevated levels.
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