Defining Stock Trends With The RSI by Mike B. Siroky
Riding The Trend
The relative strength index (RSI) is considered an indicator to apply when markets are range-bound. But here’s one way you can use the RSI to identify intermediate- and long-term trends in the equity markets.
When John D. Rockefeller was asked what the price of Standard Oil stock will do, he reportedly answered, “I believe it will fluctuate.” Fluctuating prices are, of course, the essence of an auction market that brings together buyers and sellers. Prices may fluctuate in a range that is bound by lower and upper limits that are often referred to as support & resistance. Alternatively, prices may fluctuate within an upward or downward channel. When prices break out of their range and make progress toward their ultimate destination, whether higher or lower, it is referred to as a trend.
TREND OR NO TREND?
Identifying the existence or absence of a trend is one of the most important goals of technical analysis. The classic indicator to use in a trending market is the moving average, since prices that are making progress will tend to remain on one side or the other of a properly selected moving average for most of the trend duration. The major drawback to the moving average is lag, as the moving average cannot reflect current reality since it’s based on past data.