Thursday, November 3, 2011

Using RSI

The following was featured in the "Today's Lesson" section of Quick Takes Pro yesterday. This is where we take a look at a topic in technical analysis relevant to what is happening in the market right now. What is truly oversold and overbought depends on the trend and we used Amazon below to address the condition of the major indices this week.

This chart of Amazon shows how momentum indicators act slightly different depending on the trend. For example, if you believe that the normal range for RSI is between 30 and 70 then in a bull market, oversold really is roughly 40 for RSI and overbought can be up by 80.  In a bear market, oversold can be down by 20 and overbought only as high as 60.

Admittedly, this is far from a standalone analysis as it is not completely cut and dry in the real world. Also, we cannot tell if an RSI peak or trough is actual until after it happens and that means being late to the trade.

But armed with this information, when RSI peaked at 64 in February of last year, we were only a day or two away from the warning. Toss in the potential double top and trend break 9not shown) and we would have been ready when the January low was broken to the downside.

1 comment:

Blogger said...
This comment has been removed by a blog administrator.