Originally posted 08/03/2011)
This post is part of a multipart series. If you wish to start at the beginning go to Taking RSI to the Next Level
As I wind this series down on Andrew’s RSI work, I finally have something for the short term traders. The last tip I will leave with you is that size does matter at least when it comes to RSI signals. When I say size, I mean periods from the beginning (the x point) to the signal (the reference point). It goes opposite to what you might think, smaller (shorter) the signal the more powerful it is likely to be if it fires. By more powerful I mean the distance covered by the immediate move once it goes. This works with positive and negative reversals as well as bullish and bearish divergences. These signals can also come anywhere within their respective ranges. These compact signals can be like C4 when they explode. Now this doesn’t mean you will necessarily change the larger trend, but you can very likely get in on a good strong move most often immediately following a very tight signal. It can also help you enter a relentless trend more confidently on a one two four day pullback into a reversal pattern. In my charts I make sure pay close attention to 2 – 5 period signals as I believe these can be rockets if they go. This is not to say that longer term signals are not important to trend management, but the compact signals are worth looking for from a trader’s perspective. In my experience these short term signals show up more often with bullish divergences and positive reversals, but they do show up in the bearish divergences and negative reversals.
Let’s look at some charts that provide these compact signals. These will be clean charts only labeling the compact patterns of 5 periods or less with the number of periods above the arrow. They all are likely to have tons of other RSI signals we have talked about, but I want to make sure we are focusing. In the real world getting a longer signaled followed directly by one of these shorter signals is a good combination. I am also going to use some of the securities we have already seen in the series. I even hinted to the importance of these signals on the $MSFT chart in an earlier post as it was happening.
This $MSFT chart has a few signals that we could react on. The first is a 4 period PosRev (positive reversal) followed by a 2 period PosRev into a 3 period BearDiv (bearish divergence). These signals were good for immediate pops but didn’t turn into anything big right away. If you rode it to the top it was about 5%.not much of a jump. Its was the recent 2 period PosRev I was hinting to in the first post. It shot up the next day as many of them do, but didn’t run too much further before stalling with the broader markets. For those position traders who might use that 2 period signal as an entry, it still doesn’t look too bad. There are other movers Next lets look at another favorite $PCLN which had some good signals in April and May of this year.
$PCLN gave some good signals in April and May of this year. First 2 period PosRev worked well and lead to the big run into the back to back BearDiv 3 and 2 period signals. Those signals lead almost immediately to a drop where the first leg bounced right into a 5 period NegRev which led to a continuation. For the day or swing trader those patterns added to a good plan are very helpful. The signals in $GOOG below were powerful, but almost impossible to trade in some cases.
Now this chart starts with a 5 period NegRev that gapped down and was too extended to trade. However, the 4 period BullDiv started a vicious move which paused into a 3 period PosRev that again gapped up and looked to extended until it paused into a 3 period PosRev that ran higher quickly into a five period PosRev that is currently on shaky ground. I circled this area because before today it looked like the last signal was going to fail. One thing to watch out for and be a little tighter on stops is when you get multiple signals in a row at elevated RSI levels. Doesn’t mean you can’t take the trade; just make sure you use a good plan to encompass the entry. Next we have $ALXN gave good signals before and during the recent run higher.
The first signal on the $ALXN chart is a 2 period BullDiv that started the run up into a two period divergence which is followed up by an immediate 2 period PosRev. This is a pattern that will show up over and over in strong trends, so if you decided to fade it on the initial BullDiv you must be nimble enough to get out and preferably reverse the trade on the PosRev that follows. The first one or two of these are usually good, but if you get a constant string which will happen from time to time, eventually it will break the other way, so again with the good plan and risk management. Next I have a tremendous trend in $JAZZ which I will not be going through all the signals. You can see why. Many look small on the chart, but if you go to those signals on your charts and zoom in you will see most were more than 10% in a very short window.
This is the definition of one of those relentless trends that are said to be hart to find and entry. Here are a few ways you could have gotten on the $JAZZ train without too much anxiety. What a great chart.
We will end with $ZAGG where we had a patter fire just a couple of days ago so we can see how it plays out in real-time.
I have used these signals in my analysis for years and love watching to see what they can become. This is another tool to add for short term traders as well as for those who want a longer timeframe and look for places to pyramid their positions.
This post brings this series to a close of the last piece. There is much more to Andrew’s work, but I believe there is something in here for almost any type of trader out there. I hope it helps as many as possible better understand how to use the toolkit that the RSI indicator has become thanks to Andrew’s work. I know it will and has helped me tremendously already. These ideas have proven themselves through all types of markets and securities from monthly charts all the way down to 5 minute charts. Use this information to experiment yourself and explore how it best fits your style.
Finally, don’t forget that in the next couple of weeks I am going to do an interview with Andrew about his trading career as a CTA, his extensive RSI work as well as other tips we might be able to get out of his 30+ year trading career. Send me your questions to firstname.lastname@example.org and I will organize them and get as many as possible answered.
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