| Relative Strength Index (RSI) is a well known and | | | | It's important to separate between the daily and |
| much used | | | | weekly charts used |
| momentum indicator. It was invented by J. | | | | for each indicator.A less aggressive approach is |
| Welles Wilder Jr., | | | | then to wait for the high of the weekly |
| a great technical analyst.RSI compares the | | | | bar that caused the Cycle10 reversal, to be |
| magnitude of a stock or index's recent gains | | | | broken by a few points. |
| to the magnitude of it's recent losses and that | | | | Depending on the risk tolerance, a protective |
| information is | | | | stop can be placed a |
| turned into a number that ranges from 0 to 100. | | | | few points below the swing low or below the low |
| A single | | | | of the bar which caused |
| parameter is used, the number of time periods | | | | the weekly Cycle10 reversal. When weekly |
| for the calculation. | | | | MACD's signal line crosses it's |
| 14 periods is recommended by Wilder.Common | | | | moving average, a bullish trend reversal |
| practical use of RSI in stock market timing is to | | | | confirmation is given.Taking Profits |
| measure | | | | Deciding when to take profits is often viewed as |
| the underlying strength of the market and to | | | | the most difficult |
| determine if it's | | | | part of trading. I would consider taking profits, |
| getting overbought or oversold. Wilder's own | | | | when the 38.2%, |
| recommendation was to | | | | 50% or the key 61.8% Fibonacci retracement |
| use 70 and 30 levels, to indicate an overbought | | | | levels (of the previous |
| and oversold market, | | | | bearish trend) are reached. It depends on how |
| respectively. If RSI rises above 30 it's considered | | | | overbought the market |
| bullish for the | | | | has become, when those Fibonacci retracement |
| stock or index. If the RSI falls below 70, it's a | | | | levels are touched. |
| bearish sign.Bullish & Bearish DivergencesStronger | | | | Another, usually slower approach, is to simply |
| buy and sell signals can also be generated by | | | | take profits when MACD |
| looking | | | | turns bearish again (MA crossover).The odds for |
| for positive and negative divergences between | | | | a successful trade would increase if weekly MACD |
| the RSI and | | | | has just |
| underlying prices. For example, a falling market | | | | been through a bullish divergence pattern |
| index whose RSI | | | | formation first, before |
| instead rises from a low point of 10 and back up | | | | entering bullish mode (MA crossover).Other profit |
| to above 50. The | | | | taking suggestions are when weekly Cycle10 |
| underlying index will often reverse it's direction | | | | makes a bearish |
| soon after | | | | reversal up in it's sell zone (closing basis). A |
| such a divergence. Divergences that occur after | | | | drawback with this |
| an overbought or | | | | method, is that Cycle10 doesn't always reach it's |
| oversold reading, usually gives more reliable | | | | sell zone, before |
| signals.Center Line Break | | | | making a bearish reversal.Another good point to |
| A bullish or bearish indication is given with | | | | take profits, is those times when the key 61.8% |
| readings above and | | | | Fibonacci price level is reached and Cycle10 at |
| below the 50 level. A reading above this center | | | | the same time is in it's |
| line indicates that | | | | sell zone. In this case a bearish Cycle10 reversal |
| average gains are higher than average losses. A | | | | is not waited for. |
| reading below 50 | | | | Any market wants to reach it's key 61.8% |
| indicates that bears are winning the fight. For | | | | Fibonacci zone, 60-70% of the |
| confirmation of | | | | time, before making a new trend reversal.Short |
| bullish and bearish signals, some traders look for | | | | (Bearish) Entry Parameters: |
| moves above and | | | | Weekly MACD must be in bullish mode (closing |
| below 50, respectively.Below is the author's | | | | prices). |
| special indicator combination and settings, | | | | When daily RSI rises above 60, weekly Cycle10 |
| for short & medium term stock market | | | | must be in it's sell zone |
| timing.Daily Chart: | | | | (above 70) and make a bearish reversal on a |
| - 200 ema (exponential moving average) | | | | weekly closing basis, before |
| - 89 ema (closing prices used for both ema | | | | entry. Again, a less aggressive entry, is then to |
| calculations) | | | | wait for the low of the |
| - RSI set at 25 periods with horizontal lines at 60 | | | | bar which caused the Cycle10 reversal, to be |
| and 40Weekly Chart: | | | | broken by a few points. |
| - Walter Bressert's Cycle10 plotted with | | | | A protective stop can be placed a few points |
| horizontal lines set at 70 and 40 | | | | above the swing high or the |
| - MACD plotted with Signal Time Periods set at | | | | high of the weekly Cycle10 reversal bar. When |
| 5By the use of a 25 period RSI on a daily chart, | | | | MACD's signal line crosses |
| in combination | | | | it's moving average, a bearish trend reversal |
| with Cycle10 and MACD, plotted on a weekly | | | | confirmation is given.Taking Profits |
| chart, larger tops and | | | | The same suggestions as for the Long entries, it |
| bottoms can often be found. This special indicator | | | | depends on how long you |
| setup can be a | | | | are willing to stay in the trade. When the 38.2%, |
| contributing factor for more accurate stock | | | | 50% or the key 61.8% Fibonacci retracement |
| market timing, although | | | | levels (of the previous bullish trend) are reached. |
| no guarantees are given. Examples for 2005 are | | | | When weekly Cycle10 makes a bullish reversal |
| the significant April | | | | down in it's buy zone. |
| and October lows in the OEX, (S&P 100) where | | | | When the key 61.8% Fibonacci level is reached |
| the RSI dipped below 40.Later in 2005 and so far | | | | and Cycle10 at the same |
| in 2006, three RSI moves above 60 all alerted | | | | time has entered it's buy zone, without waiting |
| about important OEX peaks, in November, | | | | for a bullish reversal.For your profit taking |
| January and March.Below is how i use this as an | | | | decisions, the 89 and the 200 EMA, plotted on the |
| alert system in my own technical analysis:By using | | | | |
| this 25 period RSI, instead of the standard 14 | | | | daily chart, can also be used as important |
| RSI, some | | | | resistance and support levels |
| whip-saws will be filtered out. When RSI 25 | | | | to be aware of.In general, not more than 2-5% |
| climbs above 60 | | | | of the total trading capital should be at |
| or falls below 40, odds are greater more | | | | risk in any trade. This prevents the trading |
| significant tops and | | | | account from being wiped out, |
| bottoms are forming, respectively. This part of | | | | when a streak of losses may occur, as can |
| the system acts | | | | happen in any system.The trading strategy |
| as a warning, a trading opportunity shows up on | | | | outlined in this article is in no way the "holy grail" |
| the Long or Short | | | | of stock market timing. It's an opinion of when |
| side and more attention is given.Long (Bullish) | | | | important market tops and |
| Entry Parameters: | | | | bottoms can be expected and hopefully be |
| Weekly MACD must be in bearish mode (closing | | | | useful information in this regard, |
| prices). | | | | a tool in the tool box, if you like.(c) Copyright |
| When Daily RSI closing readings falls below 40, | | | | Arild MyklebustArild Myklebust publishes a Free |
| (for a bullish entry | | | | Trader's Tips Newsletter. Get Market & Indicator |
| consideration) weekly Cycle10 must be in it's buy | | | | Updates, Charts & Commentaries, Trading Tips, |
| zone (below 40) | | | | Systems and Ebooks delivered to your email box. |
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| basis, before entry. | | | | Newsletter now. |