The Relative Strength Index as a Trend Indicator
One aspect of oscillators, such as the relative strength the index (RSI) that traders may overlook is the impact the trend of the market has on the RSI readings. If the market is in a sustained up trend, the range of the RSI readings will shift upwards. In other words, an oversold reading by the RSI will not be down near the 20-25 RSI level, but more likely, the RSI will turn up from approximately near 40, and during the price peaks the RSI will reach above 70.
If the market is in a down trend, the RSI will flash readings below 30, and during the countertrend rallies the RSI will peak near 60, never reaching the classic overbought 75 level.
These two observations can be part of analysis of the trend. If the RSI is consistently hitting 65 or higher and turns up from above 38, then the market is in an up trend. If the RSI had been peaking above 65, and now peaks below 62, but still turns up from above 38, the market is in a trading range with a bullish bias. If the RSI flashes a reading below 38, and peaks below 62, then market is in a down trend. If the RSI had recently been below 38, and starts turning up from above 38, but still rolls over from below 62, then the market is in a trading range with a bearish bias.
Checking the example presented, which is a 25,000 contract constant volume bar with the 14-bar RSI color-coding the bars to be green if the RSI is greater then 50 and red if the RSI is below 50, there are two features to understand. First, notice how persistently the bars are colored green. That indicates positive momentum. Next, when the RSI turned red to the left of point A, the RSI never flashed a reading as low as 38, so those were oversold conditions in the upward trend.
At point A, the RSI at the close of the price bar was below 38, signaling a down trend. Now, green bars are a sign of overbought conditions, unless the RSI displays a reading above 62, which it did at point B, signaling an up trend again. But, the RSI then formed a peak below 62, indicating a trading range with bullish bias.
As with all of technical analysis, there will be a lag by any study with rules indicating the direction of the trend. But, many times a trend carries far longer than anyone expects, so, having studies that keep you thinking with the trend is the way to approach the markets.
January 3rd, 2007 at 10:37 am
[…] The daily bar chart of the 10-year T-note futures contract shows that the market has turned up from a support zone. However, the RSI has closed below 38, which is a bearish sign. […]
January 3rd, 2007 at 10:39 am
[…] Checking the daily bar chart of the EURUSD futures contract traded on Globex, we can see that the price has is holding just below a resistance zone. The RSI has just barely closed above 62, which is bullish momentum, but somewhat suspect with such a close reading. […]
January 4th, 2007 at 9:37 am
[…] The daily bar chart of the EURUSD futures contract traded on Globex has a support zone plotted. Now, I will watch the TradeFlow chart of the contract to see if buyers come in. I still view the RSI as flashing bullish momentum readings. It is critical that the RSI does not close below 38 on a daily bar basis. That would signal a bearish momentum environment. […]
January 4th, 2007 at 10:02 am
[…] The daily bar chart of the 10-year T-note futures contract shows that the market is continuing to advance after hitting the support zone. Still, the RSI has closed below 38, which is a bearish sign. I would watch for a test and possible false breakout of the down trend line. Tomorrow’s employment data will be key. […]
January 4th, 2007 at 3:28 pm
[…] The daily bar chart shows Crude has broke down through a support zone, which will now be resistance. The RSI is well below 38. I consider RSI readings on a closing basis below 38 to be a sign of negative momentum and sets the trend to down. I do not see this as an oversold condition that means the market has to rally. It might, but I would respect the trend. […]
January 5th, 2007 at 9:32 am
[…] The daily bar chart of the EURUSD futures contract traded on Globex shows the market broke through the support zone as dollar bulls believe the employment statistics will keep the FED in a hawkish mode. The RSI is nearing the 38 level basis the daily chart. If the RSI turns up from above 38 on a closing basis, then the trading range is intact. An RSI reading below 38 on a closing basis sets the trend to down. […]
January 5th, 2007 at 10:00 am
[…] The daily bar chart of the 10-year T-note futures contract shows that the market edged into a resistance zone ahead of the release of the employment statistics and the rise in payrolls and the increase in hourly earnings brought out sellers. The market is trading down into a new support zone. Watch the RSI. If it closes below 38, then the down trend is confirmed. If the RSI traces out a pivot low above 38, then a trading range with a bearish bias is underway. […]
January 5th, 2007 at 10:34 am
[…] So far, the daily bar chart shows Crude tracing out a narrow range day. Often, this can be the end of a trend run as it indicates the lower prices are failing to attract additional sellers. And, many traders will point to the oversold RSI readings as a reason for a rally. As I said before, I would respect the down trend status and look for rallies to sell until the momentum readings indicate a change in the trend status. […]
January 8th, 2007 at 9:06 am
[…] The daily bar chart of the EURUSD futures contract traded on Globex shows the market is tracing out a narrow range so far today. If the day trades in this fashion, then this could be the end of the down trend. Watch today to see if the RSI reading is an up close. If it is, then the RSI has formed a pivot low above the 38 level and that is a bullish momentum sign. […]
January 8th, 2007 at 9:39 am
[…] The RSI reading at the close on Friday was below 38, which is a negative sign for the trend. Watch for sellers at the resistance zone just overhead. […]
January 8th, 2007 at 9:59 am
[…] The daily bar chart of the 10-year T-note futures contract shows that the market is probing the support zone. It’s possible the RSI reading will start holding above 38, and if the RSI reading is above Friday’s level at the close, then a pivot low has formed and signals a trading range with a bearish bias. […]