What the Market Strength Indicator is Telling Us
The following first appeared in yesterday’s Opening Look morning note.
Have a great weekend.
After strong market moves like we’ve just had, I always like to review our Market Strength Indicator (MSI).
This isn’t some secret, proprietary formula. It’s simple and easy to understand – a combination of trend, oscillator indicators and patterns – all factors that we base our market stance upon. And surprise, surprise, the MSI is as bullish as can be with the SPX at new highs and up 30% in three months.
1-The SPX is trading above each moving average, and each moving average is sloping higher.
2-The 14-Day RSI and Williams %R are both overbought. We use both of these since it takes a considerable up move to get the RSI to overbought territory. And while the Williams %R swings to extremes much more easily, it only can stay overbought if the market continues to tick higher with minimal drawdowns. Clearly all of this has been happening.
3-And, of course, two big pattern breakouts remain in play. In fact, two weeks ago, the MSI was even more extreme when we had FOUR patterns in play at the same time…
Here are each of those indicators together on one chart. (We don’t show the patterns here since it would be way too much to display all at once – and that would be an offensive chart crime.)
The clear next question:
Now what?
Market Strength Indicator Now vs. 4/7/25
First, the obvious.
The MSI was completely depressed on 4/7 after two months of intense selling and extreme volatility. Interestingly, though, after that last massive downside gap on 4/7, the final bearish pattern target was hit. That set the stage for a bottoming process to potentially begin…
With the pendulum now having completely swung from historically oversold to now extended, does a very bullish MSI suggest the upswing is unsustainable?
Bulls and bears agree on one thing these days: The pace of the last three months can’t continue, and at any time, a pullback greater than the 3.5% drop from mid-May is going to happen. It’s just a matter of when.
Now let’s look at the recent times when the MSI got to extreme levels like now…
Market Strength Indicator Now vs. 2023-24
The results are crystal clear. “Extreme” MSI readings are the result of strong technicals. Strong technicals occur in uptrends. And uptrends tend to last longer than many think are possible or probable.
From this perspective, only once did a correction begin right after a high MSI reading – in July’24. At the time, though, only one bullish pattern was in play (the one with the long-term 6,100 target that was triggered way back in Jan’24).
Now, of course, we have two live bullish formations, and for the uptrend to persist without a major market disturbance, we’ll need to see the next bout of profit-taking morph into the next set of short-term bullish formations.
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