The Shanghai Composite index is located at extremely overbought levels on a relative strength index (RSI) basis which is reason for caution relating to the...

The Shanghai Composite index is located at extremely overbought levels on a relative strength index (RSI) basis which is reason for caution relating to the sustainability of the current rally. The index originally generated a technical buy signal at 2105 on 24/7/14 (and has gained 38% since that date). The index technicals have remained positive given a technical top has not been generated. The RSI in isolation does not identify market turning points, as even though a market is overbought does not mean the situation will immediately correct itself. However, it does identify when market momentum has moved to an extreme, as is the current situation, and highlights that caution is warranted. A technical top formation will need to be generated to trigger a technical sell signal on the index, and indicate that the downward correction phase has commenced.