Soon after XLE made its March 2012 high of $75, the RS line violated support (line e) and started to lead prices lower. I have often observed that the RS line will break support ahead of prices, and this action should not be ignored. In this instance, XLE lost over 10% in the next three weeks.
The RS line moved back above its WMA in late June, and by July 16 had clearly started a new uptrend. It is still well below both its short-term (line d) and longer-term (line b) downtrends. So a major turn has not yet been confirmed.
On the hourly chart, I have added the 54-period simple moving average (in blue). As XLE was rallying sharply in early 2012, the hourly RS line was forming lower highs (line a). It just reached this downtrend as XLE was peaking.
On February 24, XLE made its high, and by February 29 the hourly RS had started a new downtrend (line 2), with XLE closing at $74.92. The hourly RS made lower lows into late June, and the first sign it was bottoming came on July 3, as it moved above the June highs.
A hourly bottom in the RS analysis was confirmed on July 17 (line 3), as the relative performance overcame further resistance (line b), with XLE trading at $68.39. In either an uptrend or downtrend, the hourly relative performance line tends to respect its 54-period SMA.
The weekly RS analysis has done a good job over the past two years in keeping investors out of the big bank stocks like Bank of America (BAC).
In April 2010, BAC made a high of $19.86, which was well above the late 2009 high (line a). The weekly RS had been diverging from prices, having begun to form lower highs (line b). Three weeks after BAC made its high, the RS dropped below its WMA.
In July, the RS broke below support (line c), and BAC spent the rest of the year declining. In December, the RS line moved above its WMA but failed to move above the previous peak (line d). If the RS had been able to move above this level, it would have suggested that a new uptrend was underway.
The rally peaked in early 2011 and just reached the 50% Fibonacci retracement resistance from the 2010 high. By March, the RS was back below its WMA, and a month later had dropped below the December lows. BAC declined from the early 2011 high of $15.31 to a low in December of $4.92, a drop of 68%.
The rally in early 2012 was a bit stronger technically, as the RS moved above its WMA (line 1) as BAC closed at $6.61. The rally continued for ten more weeks, and the RS line was able to move above the October highs. BAC had a high of $10.10 in March, again reaching the 50% Fibonacci retracement resistance from the early 2011 highs.