Stocks & Commodities V. 28:4 (38-40): RSI Trends by Cory Mitchell

Stocks & Commodities V. 28:4 (38-40): RSI Trends by Cory Mitchell
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RSI Trends by Cory Mitchell

What does the behavior of the relative strength index within a trend tell you about the strength of the trend?

While one common method uses divergence between the relative strength index (Rsi) and price, we can go beyond that and find out if a trend is likely to continue. We can do so by looking at certain Rsi levels contained in a trend; this provides us with valuable information for making trades within the current trend. Watching for breakouts of these Rsi levels can also provide us with confirmation for what is happening with price.

SUPPORT AND RESISTANCE LEVELS

Just as price will show respect for support and resistance levels, Rsi levels do as well. This can be an extremely valuable tool for confirming trends and possible reversals. In a bull market, the Rsi (in this case, I will use the 14-day) will often be seen moving between 3040 lows and 8090 highs. In a bear market, it will move between 2030 and 6070. These key levels seem to hold in all markets regardless of the time frame. Each market seems to find its own support or resistance within the levels outlined.

In Figure 1 we see the Dow Jones Industrial Average (Djia) in a downtrend. The Rsi at the bottom of the chart shows that the indicator only gets as high as 67 during the entire downtrend (the middle line marks the 50 level). The Rsi has respected that resistance level throughout its downtrend. Near the bottom of the Rsi, we see that the Rsi has bottomed around the 30 level with extreme lows at 22. This is valuable information, as these levels can provide us with confirmation that this trend will continue, or the level on the Rsi where it is likely to reverse.

In Figure 2 is another example, this time with an uptrend and a downtrend. During the uptrend (orange lines on Rsi), the Rsi moves between 37 (each stock or market will have its own levels within a few points of the bear/bull levels specified) and 80. As the price accelerated upward from January through June 2008 the 40 level on the Rsi was not approached, as the Rsi stayed in the 5070 range most of the time. As the price began to break down in July 2008, the Rsi broke through that 37 support level and established a new range (red lines on Rsi), this time at the lower levels of 2760.




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