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trending up, then the RSI values have been oscillating within the 80/40 range. The bulls will find a reason to get long every time the RSI value approaches the 40 level. Should the bulls fail to buy when the RSI value declines to the 40 level, and the RSI value declines to, say, 30 before turning back up, a range shift has probably taken place. Confirmation of such a range shift occurs when the RSI value rallies and fails to go over the 60 level before dropping. When the RSI violates the 40 level, it is often the first indication that the trend is changing. The reason that typically the first indication comes with the range shift is because the RSI is a momentum oscillator. The interesting thing about momentum oscillators is that they lead price action. In other words, momentum, since it measures the rate (or speed) that prices are changing, will always begin to weaken before the price weakens. So in an up trend, momentum will quit moving up while prices continue to move higher. |
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As shown in Figure 16-4, in an 80/40 range the RSI will oscillate between 80 and 40a strong indication of a bull market! Likewise, in a 60/20 range the RSI will oscillate between 60 and 20a strong indication of a bear market! When I look at a chart of a commodity or stock I always look at the RSI. I want to see what range it is inthis is the first technical indication of the trend. It should be confirming what the price action is telling me. The RSI will also find resistance or support at previous tops or bottoms in the RSI itself. Old resistance points could become new resistance points and, if broken, a new support level upon a retracement. Likewise, old support levels could prove to be effective support again and, if broken, will prove to be effective resistance. In Figure 16-5, we see how bonds rallied from a low of 118 to 135 over a period of 6 months while the RSI remained above 40. We can also see how in early July the RSI rallied (point g), and again in early August (point h) that became support when the RSI declined in September. Point i found support at what was resistance (point g), and point j found support at point h, a former resistance level. |
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You always want to watch for former support and resistance levels, in both the price chart and the RSI chart. My trading platform allows me to type notes, prices, and fundamental events directly onto my price chart. Then every day when I reload, I see all my notes right there on the chart. Every chart I look at always has the price action (displayed as candlesticks) in the top part of the screen and an RSI chart directly under it. I then type the price onto the RSI chart at every point where the RSI reversed itself. In this manner I can look at my RSI chart and see the price where the RSI found effective resistance and support. I can also see what level the RSI itself found effective resistance and support. In a trending bull market, the price and the RSI charts will both show that what was |
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