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High Altitude Trading with RSI - GTLackey's RPM

High Altitude Trading with RSI

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High Altitude Trading with RSI

I have seen a lot of talk lately about RSI being overbought as it crosses the 70 level.  I often get some pretty heated feedback when I post my charts suggesting something has room to move higher when the RSI is near this level.   Many technicians and traders take this as a reason to worry or avoid a trade, today I want to show you why that might not be the best way to look at it.  I will admit, it is not easy to buy up here and you certainly can have a pullback at any time, but I have found that some of the best breakouts and strongest runs don’t even start until you get over this level.  Many of you know already know that I use RSI more for trend following than as an oscillator.  This is based on Bull and Bear Range Rules (from the RSI Series) that I use to define the trend. I have also written about how we can see a chart accelerate higher when the 9sma of RSI moves above 60.  Keeping it very simple, today let’s just deal with the indicator itself.

First we need to think about how this indicator is calculated (note Investopedia totally disagrees with what I am telling you here).  Any indicator that is bound from 0 to 100 will slow its ascent (descent) as it reaches an extreme.  This allows price to move much great distances than the oscillator will.  I think this is the key most overlook when using an indicator such as RSI.

Below I have quite a few recent examples that will show how well this can work.  Of course it won’t all the time, but that is what your risk management plan is for.  All of these charts have lines through the point at which RSI moved over 70.  You will notice, it doesn’t have to stay over 70 for the run to continue.  Part of my risk management plan is making sure it stays over 50 (marked by arrows in some charts) on any pullbacks. 40 is the actual threshold for the bull range, so longer term traders and investors or those with big cushions in the trade are better using that number. (click on chart to open larger in a new window)

10-20-2013 XEC rsi10-20-2013 MPEL rsi

10-20-2013 PXD rsi

10-20-2013 LUV rsi

10-20-2013 CLB rsi

Yes, it also works on weekly charts.

10-20-2013 FSS rsi wkly…and when both the daily and weekly move above this level it can get really exciting

10-20-2013 TSLA rsi

The arrow on the above daily chart of $TSLA lines up with the arrows on the weekly chart

10-20-2013 TLSA rsi Wkly

$LNG another good example.

10-20-2013 LNG rsi

10-20-2013 LNG rsi wklyIt can be an amazing move.  I have a dozens of charts like this from a scan I did today, but this post is already getting long so I will end with a chart you should think about in context of this post.

10-20-2013 GOOG rsi

What is next for the $GOOG?

Good Luck, it is there for the making!

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(All market data above are derived from Stockcharts.com, Esignal, and Reuters datalink)
The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.  Neither the information, nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities. I or my affiliates may hold positions or other interests in securities mentioned in the blog.  Full Disclaimer
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

About Author

Tommy

is a Chartered Market Technician (CMT) and Certified Financial Planner (CFPr) in Greensboro Georgia (Outside Atlanta). Founding partner of Barber Lackey Financial Group, LLC, a Registered Investment Advisor. However, this blog is not affiliated with BLFG and does not make recommendations to buy sell or hold any securities.

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