Recent Rally Suggests Further Upside Potential for the S&P 500 Momentum Setup

We are revisiting this chart due to its relevance to the current market rally. The upper panel displays the five-period Relative Strength Index (RSI), while the lower panel shows the daily chart of the SPDR S&P 500 ETF Trust (SPY). Historically, it has been viewed as a bullish signal when the RSI (5) climbs to +90 following a market low. With the indicator currently at 84.75, momentum remains strong and points to the potential for further gains. The green shaded areas highlight prior lows in the SPY, while the blue lines indicate previous instances when the RSI (5) reached the +90 level.

Over the past three years, and across the market’s last three major bottoms, the RSI (5) reached the +90 level at least twice during each recovery phase. In the current setup, the indicator has only recorded one such reading so far, though another could emerge in the near term. Historically, repeated RSI (5) readings above +90 have signaled that the rally may only be at the midpoint of a broader upward move.

The RSI (14) could climb toward the 80 level during the current advance, potentially paving the way for further upside. The indicator is currently at 76.85. As noted in yesterday’s commentary, the upper panel shows the 14-period RSI dating back to 2002, with blue dotted lines highlighting previous occasions when the RSI (14) reached 80. Historically, an RSI reading of 80 has reflected exceptionally strong market momentum and has never coincided with the final peak of a bull move.

Since 2002, the RSI (14) has touched 80 only eight times — roughly once every three years — making it a relatively rare event. Yesterday’s reading stood at 76.52, just 3.5 points below the 80 threshold. The significance of approaching 80 is that, in past cycles, it has often marked the midpoint rather than the end of a market advance. If the RSI does move up to 80 in the near term, it could provide a basis for projecting higher price targets for the ongoing rally. We will continue monitoring this chart closely going forward.

Yesterday, we highlighted the long-term outlook using the monthly RSI of the HUI/Gold ratio. A monthly RSI reading above 50 typically signals that HUI is in an uptrend, while a reading below 50 points to a downtrend. At present, the monthly RSI remains above 50, indicating that the longer-term trend for HUI — along with related indices such as GDX and XAU — remains bullish.

The chart above focuses on the intermediate-term outlook for GDX, which can weaken temporarily even within a broader long-term uptrend. The second panel from the bottom tracks the daily cumulative advance/decline line, while the panel above it shows the daily cumulative up/down volume, both for GDX. When both indicators trade above their mid Bollinger Bands, the intermediate-term trend is considered positive and is highlighted in green. Conversely, when both fall below their mid Bollinger Bands, the intermediate-term trend is viewed as negative and is shaded in pink.

Although the intermediate-term trend currently leans bearish — or more likely sideways in our view — we continue to focus on the longer-term picture, which remains constructive and bullish.