TECH TALK TUESDAY
September 24, 2019
How to use some measures
RELATIVE STRENGTH INDEX
Pretty much this index is either mis-used or over-used.
Commonly when RSI is in the upper or lower level it is called, either Over-Bought
or Over-Sold, which are both very inexact and can be terribly misleading.
Labelling a stock either Over-Bought or Over-Sold, can position and investor to do the wrong thing.
The term I like to use, is Over-Extended, either to the Up-side or the Down-side. In each case RSI is in a place where reversals can begin to be effective.
Below RSI 30 or over RSI 70, is where reversals often come about, but when they come about is not as clear cut without another confirming measure or two. Just being in those zones is no guarantee of reversal yet.
We all know we can count on stocks fluctuating, the question
clearly is how to use that knowledge to your advantage and profit.
The problem is that a stock’s RSI can loiter in a given zone for some time without setting up a trade. Weakness or strength in the stocks advance can signal it dropping out of whatever zone its in. Sometimes after leaving a zone, the RSI can go right back into that zone.
Saying it is Over-Bought, may give you the idea that a decline is imminent, same as Over-Sold as a term may make you think that stock is ready to run to the upside, but no such thing has to happen in either case until the timing indicators confirm or deny it happening. Except for a crescendo in the volume and then watching it diminish, there is no extra clue in those charts to give you any hint of what is to come next, or when. So, do not be given a pre-set idea of what to do when you hear those terms. It follows that we will discuss confirming measures of using RSI.
For sake of discussion, RSI in its simplest form, is the current price, divided by the stocks previous price any number of days ago, specified in our calculation.
It is an internal calculation of the stock’s internal strength, either stronger or weaker.
So now, neither chart gives you any indication of a support or resistance, for either of these stocks, so without further confirmation, this is a guessing game.
So, when we take up further using other measures to confirm or deny the validity of an Over-Extended move, we will try to find out which way this is going, and if we are luck, how far it might go.