Thanksgiving week typically sees stock trading volume drop precipitously the closer the holiday gets and, at best, modest changes the day after a day off.
But markets still buzzed with plenty of trading on both Nov. 21 and Nov. 22, with key stocks like Microsoft (MSFT) – Get a free reportAmazon.com (AMZN) – Get a free reportAdobe Systems (ADBE) – Get a free reportand the main Facebook metaplatforms (GOAL) – Get a free report reaching 52-week highs on Wednesday.
When trading closed on November 22, the S&P 500 index had risen 11% from its October 27 low of 4,104, and an important measure of momentum, its relative strength index, had reached 71.3.
A reading above 70 suggests that the index (or a stock, for that matter) is overbought and could pull back.
The Nasdaq Composite Index (^COMPX) – Get a free report it reached an RSI of almost 72 on Tuesday. The Nasdaq-100 index’s RSI surpassed 72 on Nov. 20 as traders struggled to decide how to fight the battle for control of artificial intelligence.
The Dow Jones Industrial Average RSI (^DJI) – Get a free report ended at 71.2, largely because Microsoft hit a new 52-week high of 379.79. The average rose 185 points, or 0.5%.
Does that really mean a pullback is coming? The general rule of thumb about RSIs is that moving above 70 is a warning. More than 75 is a probability. Above 80 indicates that a liquidation will occur in a very few days.
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When the RSI falls below 30, the stock is oversold and 25 means a rally is coming soon. At 8 p.m., the rally is ready to begin. (You can find RSI levels on large investment sites and on many brokerage and mutual fund sites.)
Whoever makes these decisions in these scenarios is probably not human. All trading houses, money management giants and the like have computers configured to immediately react to various inputs, including RSI levels.
What happens after the October settlement?
The RSI for the Nasdaq-100 index reached 76 in mid-July. A nasty correction broke out at the end of the month that did not bottom out until the end of October.
When the bottom hit, the jumps in many stocks were immediate. Consider what happened to the magnificent group of seven tech stocks after hitting their lows in October.
- Apple (AAPL) – Get a free report: Up to 15.5%.
- Amazon.com: 18.3% increase.
- Google main alphabet (GOOGLE) – Get a free report: Up to 15.2%.
- Facebook parent metaplatforms: 22.2% increase.
- Microsoft: 16.5% increase.
- NVIDIA (NVDA) – Get a free report: Up to 24.2%.
- tesla (TSLA) – Get a free report: Up to 15.7%.
stocks were soaring in November 2021 when the Federal Reserve announced that inflation was getting out of control and would be aggressively attacked. The RSIs of all major averages reached 70 degrees.
The fall lasted almost all of 2022.
The magnitude of the pullback that could occur at this time could be modest. The RSI data so far is not extreme yet.
Furthermore, stocks and bonds are sensitive to price conditions, interest rates in general and bond yields in particular, economic trends and geopolitical realities.
Many market analysts predict that stocks will rise in the new year. But, given the gains since October, gains between now and December 31 may be modest.
In other words, a setback is not the end of the world. It may be a good time to look closely and look for bargains.
