Follow the Money, Trade the Trend

Link to YouTube Video: https://www.youtube.com/watch?v=7mxiNbHGNlw

Introduction:

Forming a bottom in the market is a process, not a single event in time. Bottoms take time to form. You need a transfer of shares from weak hands to strong and investors need a chance to reinforce/re-evaluate their investment thesis. It takes more than a stock breaking out and over a moving average. It takes a catalyst and a confirmation of momentum change. You need to see a change in market participant sentiment. Bullish Relative Strength Index (RSI) Divergence is one way to measure that sentiment. 

Brief RSI Explanation: 

If you’re a newbie to the RSI, here’s a brief summary of it. The RSI was invented in 1978 by the great J. Welles Wilder. RSI is a momentum oscillator, meaning it measures price’s rate of change and compares it to the last 14 days of price movement to determine if the current price movement is increasing the absolute value rate of change, either to the upside or the downside. RSI has many uses, with the most popular being the Overbought and Oversold indicator. While the many uses of RSI are important, today we will take a look at my favorite use for the indicator, identifying bullish divergence.

Bullish RSI Divergence: 

Bullish divergence is very simple in practice. Price makes a lower low or an equal low, while the RSI makes a higher low. Here are some examples for you:

($FNF sporting a Bullish RSI Divergence)

Fidelity National Financial ($FNF) made its final low of 2022 in the middle of June, RSI also made a new low. After trading higher until September, $FNF pulled back and made an equal low at the end of September. RSI on the other hand made a higher low, a very bullish formation. So what does that mean from a technical standpoint? Sellers were clearly in charge for most of September of 2022. There is no denying that fact and the evidence is simple, price went down. What is important to notice has to do with the RSI not also making an equal low. Again, RSI measures the momentum of a change is price. With the thrust down in price, there was not an equal thrust down in RSI. This means buyers are putting up a fight to protect that low in price and momentum has now shifted to the buyers. Even on the next down move in price, $FNF made a higher low at the end of 2022 and the Bullish RSI divergence line was respected. This is even more confirmation that sellers have lost the momentum. Now all we need to see is a follow through of price through the $40.88 pivot and a Stage Two Breakout is in progress! 

Southern Copper ($SCCO) is another textbook example of the Bullish RSI Divergence telling you that bulls are taking control, even before there is a breakout of price.

($SCCO Bullish RSI Divergence and the subsequent Stage Two Breakout)

$SCCO came barreling into the $45 dollar level and found a short-term bottom in July of 2022. It then drifted sideways for a few months before making a lower low at the end of September 2022. During that whole sideways price movement and lower low, RSI was telling you there’s more than meets the eye in $SCCO. There was a clear pattern of higher lows in the RSI, even while price was drifting down, a tell-tale sign there was bullish momentum forming under the surface. After price formed the lower low in September, $SCCO rocketed higher and transitioned in a Stage Two Breakout when it overtook the $51.37 pivot. Price has not looked back sense and is up 50% from the Stage Two Breakout pivot. 

Bullish RSI Divergence for 2023: 

Now you may be asking, “ok, Jeremy gave an example of a boring insurance stock that may breakout in 2023 and bragged about a stock that’s already up 50%. What stocks are sporting Bullish RSI Divergence that have potential to profit in 2023?” Great question. Let’s hop into it right now. Here’s a list of stocks that have A Bull Case of 2023 (in no particular order). 

Texas Instruments ($TXN): 

$TXN is a boring analog chip and calculator maker that many people know of and use their products, but few people think of as a sexy investment. Unadjusted for dividends (which $TXN pays a lot of), $TXN is up 1237% from the 2008 lows. The NASDAQ 100 ($QQQ) is only up 993% during that same time period. This is 244 percentage points of outperformance and a clear indication that $TXN is a stock that investors should own in their portfolios. The thing I love the most about $TXN is its current technical outlook. 

($TXN currently sporting Bullish RSI Divergence)

To fit the theme of today’s article, I have to draw your attention to $TXN’s Bullish RSI Divergence. Like most stocks, $TXN hit its bear market low in the middle of June 2022 and came down to an equal level in September of 2022. Looking at the RSI, the indicator made a lower low in June but made a significant higher low in September. That’s the Bullish RSI Divergence we are looking for. 

$TXN’s bear market has been extremely mild when comparing it to many of the other $QQQ members. This added relative strength, along with the Bullish RSI Divergence, is a strong catalyst for $TXN to reach new all time highs if price can overcome the $185.38 pivot. 

T. Rowe Price ($TROW): 

Unlike $TXN, $TROW has experienced a brutal bear market. After peaking at the end of 2021, $TROW fell 58% until it found a bottom at the end of September 2022. All the time $TROW was making lower low after lower low, the RSI was telling you to begin looking closer. 

($TROW sporting Bullish RSI Divergence)

The series of lower lows in price was not confirmed by lower lows in RSI. On the contrary, RSI was diverging from price! RSI respected the Bullish RSI Divergence line for all of 2022 and now price is making a move higher after making the first higher low since the bear market started. $TROW is a low debt, high Return on Equity company that pays a large dividend and is committed to growing that cash flow to shareholders.  If you’re looking for some price appreciation to go with that dividend, $TROW looks primed for a Stage Two Breakout if price can overcome the $133.34 pivot. 

Paypal ($PYPL): 

$PYPL, a company who’s broken many hearts in the past year. Retail investors and Cathie Woods piled into $PYPL when it was up huge after the post-Covid boom in growth stocks. Since peaking in 2021, $PYPL went on to lose 78% of its market cap. That does not bode well for an investor looking to make some gains in the market. We’ll if you were smart enough to get out of $PYPL before the huge decline and now you’re wanting to know when to re-enter, now is your time to start paying attention. 

($PYPL sporting Bullish RSI Divergence)

After a series of lower lows in price, with no divergence from RSI, $PYPL had a shift in sentiment in June of 2022. After a brief run higher, $PYPL pulled back and formed a Double Bottom in December of 2022. To accompany the Double Bottom, $PYPL had also formed and respected a Bullish RSI Divergence trendline. This formation of technical patterns gave us a clear signal that bulls are in control of price and a move above the $91.03 pivot puts $PYPL back in Stage Two Breakout territory. 

CONCLUSION: 

Bullish RSI Divergence is a signal that price momentum may be shifting from bears to bulls. With price making lower lows and equal lows, RSI is making higher lows. There is bullish momentum bubbling within the stock and all it takes is price breaking above a key pivot to push the stock higher. 

Bullish RSI Divergence works on any asset: equites, bonds, commodities, ETFs, currencies, etc. 2023 may be the year of the Bullish RSI Divergence breakout if there are a sustained number of assets successfully moving off their 2022 lows. I’ll leave you with a weekly chart of the S&P 500 ($SPY). Do you see anything important in the chart ;)? 

($SPY sporting Bullish RSI Divergence)