RSI (Relative Strength Index)What It Is: The RSI is a single line oscillator created and introduced in 1978 by renowned market technician, Welles Wilder. This popular indicator can also be displayed as a histogram. Most charting packages offer it. Range: 0 - 100 Default or look-back period: 14-day, or 14-period RSI. If you prefer a longer or shorter time frame, the 25-day and 9-day look-back period also work well. Just remember, as with most indicators, the shorter the time frame you use, the more volatile the indicator’s signals. HOT TIP: Don’t confuse the RSI with the “relative strength” of a stock, a term that refers to a security’s strength in comparison to an index, such as the S&P 500. What the RSI Tells You: When the RSI dives below 30, it signals the stock is oversold. If it falls below 30, then hooks to the upside = buy signal. When the RSI shoots above 70, it signals the stock is overbought. A hook to the downside from above 70 = sell signal. When an oversold or overbought RSI diverges from price--for example, price rises, while the RSI falls--that bearish divergence signals that the current trend may soon change direction. As you know, trend reversals offer optimum entry opportunities for all trading time frames. Figure 1 shows a daily chart of the Mosaic Co. I plotted the 28-day moving average (red line) on this chart, as it seems to work well with a 14-day RSI (middle scale). On the RSI (middle scale), I drew horizontal lines at the 30 and 70 measurements, so you could clearly see the overbought and oversold zones.
FIGURE 1. RealTick® graphics used with permission of Townsend Analytics, Ltd. ® 1986 – 2008. As you can see, the fertilizer and animal feed producer rose in an uptrend between January and June, with a few deviations along the way. In February, MOS soared to a high of 119.78, but the RSI wasn’t so enthusiastic. And although it rose above 70, it ultimately created a bearish divergence from price. During that time, the RSI displayed another of its characteristics—the ability to form patterns. Notice the shallow head-and-shoulders pattern drawn by the RSI; I’ve drawn in the neckline with a red line. The RSI subsequently fell below the 70 line and MOS succumbed to sellers. In April, MOS shot to a high of 143.32. Again, the RSI lacked the same exuberance, and MOS soon fell abruptly and returned to its 28-day MA. HOT TIP: When the RSI wanders around the mid-zone between 30 and 70, its signals are not significant. It’s most useful when it moves into its oversold or overbought zones, then reverses. In May, the RSI bounced off of its 30 line, and MOS during the new two weeks, MOS flew to new highs of 163.25. (A good trade: an entry just above mid-May resistance of 130, and an exit when the RSI hooked down right at the new high.) Finally, MOS’s RSI bounced off the 30 line in early July, and experienced traders could have made a quick swing trade for a few points before MOS succumbed to a late-month sell-off.  Secrets to Profiting with Exchange Traded Funds (3) DVD Set List Price: $299.00 Internet Price: $199.00   Wealth-Building Strategies for Active Investors (3) DVD Set List Price: $299.00 Internet Price: $189.00 |
  
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