(Originally posted 7/21/2011)
Now that we know the ranges for RSI that help us identify the current trend, the next step is to figure out how to identify the most explosive part of the move. This would be the acceleration phase of a trend. Using the range boundaries and adding moving averages you can get confirmation of a trend, but you can also get a signal when the trend is likely to accelerate. The two moving averages that are used for this portion of the analysis are the 9 period simple moving average (sma) and the 45 period exponential moving average (ema). The same moving averages are used on price in most charts. This idea works by following the moving averages of the indicator as they move with the indicator using 40, 50, and 60 as signal levels to the trend. Now the signal actually depends on which direction the average moves through not just which zone it is sitting in at a point in time. Using the 9sma for the shorter trend and the 45ema to measure the longer term trend give two distinct perspectives of the move. I have hidden the actual RSI on these charts to focus better on the averages. So when the 9sma moves over 40 then your trend is turning up. When it moves over 50 the trend is confirmed, but once it move over 60 you should see almost immediate acceleration to the upside in many cases. The same works in reverse, so when the 9sma moves below 60 then trend is changing from up to sideways or down, below 50 then you should be trending down and below 40 you see acceleration to the downside. Let’s see this in action. This first chart is of $AMAT and it has signals on both sides to look at and get an idea of this action. Click on any of the charts to open in a new page for better viewing.
In the charts below we will focus more on the 40 and 60 crosses. The lines showing a cross above 60 or below 40 anticipating acceleration are the thicker and denoted by blue arrows (ignore the other symbols they are other signals I have programmed on these charts). The moves above and below 50 (marked with dotted line) are more important when the 9sma doesn’t move outside the 40 and 60 boundaries to give a normal signal. The charts come from the StockTwits 50 for strong trends and various sectors for downtrends so we can cover both directions.
First we see $GTLS in a big run higher with some decent signals along the way. A key value to this analysis is that the acceleration signal comes right about the time many would be saying indicator is overbought and too high. Also notice the downtrend signals were not that powerful here showing the strength of the uptrend.
$JAZZ is also only giving a few stronger signals, but the one in the middle is a monster. Notice the orange 9sma didn’t move below 60 the entire run. The latest signal has definitely been profitable, but it is still to be seen how much it will yield.
A couple of things to note on the downside charts below is that the signals are more prevalent and erratic which is normal for downside moves. This means you have to adjust your rules on how to trade just as you should with anytime you are shorting. One example of this would be to use one barrier to initiate the short and a different barrier level to get out or some other risk management measure. On the short side risk management should always be tighter.
Here we look at $BAC (original post mislabeled this $F) and see there are many more signals that can jerk you around, but the overall guidance was pretty solid. On many signals you might have to endure a retracement before going lower, but that is shorting for you. Also, if you had different risk management in place and taken the original signal at the beginning of each leg you could have remained in the trade a while depending on your tolerance for volatility.
$DLB is also in a downtrend and has been for a while, but this chart has given us strong signals on both sides. You can see at the left side of the chart there is a good run up which you could have profited from, but since this is a chart for the downtrends let’s look at those. There are three acceleration signals, all of which would have given you a profitable short. The acceleration signal in January of this year would have yielded monster results. The latest signal was solid as well.
Now let’s look back at all these charts and look closer at the blue 45ema. You can see this average moves slower and is less likely to go over 60 or below 40, but when it does you usually have a stronger move. This moving average analysis also seems to have better success as a stand alone idea on the long side, but when used with other analysis it can certainly add value in either direction. Often I will use it to help confirm what I am seeing in the 9sma by simply looking at the slope of the 45ema. I did not mark these signals but you can see they tend to go with the longer trend.
Another good way to use these moving averages on RSI is to watch for the crossovers and convergences almost like an MACD of the RSI. You can see clearly on the F chart as well as others that many times the 9sma will find support or resistance at the 45ema adding good info about where you are in the trend.
As with most technical analysis, this can be used on any security and any time frame, so t this info and do some testing yourself to see how it might help your trading. Now if you are working with www.stockcharts.com or many other charting options and can only plot one of the moving averages I would go with the 9sma, but really that decision depends on your trading style
Next installment we will discuss Andrew’s most unique signals he developed on the RSI as we explain positive and negative reversals.
Good Luck, it is there for the making!
(All market data above are derived from Stockcharts.com, Esignal, and Reutersdatalink)
BLFG is not affiliated with Cardwell Financial Group.
There is no guarantee that the views expressed in this communication will become reality. Investing in the stock market involves risk and potential loss of principal, Investment strategies should be thoroughly researched and understood before implementing and none of this should be construed as a recommendation