Brandon Wendell, CMT
Brandon Wendell
In past articles, “Modified Odds Enhancer,” and “Use the 60-40 Bounce or Break for greater Profits,” I discussed using a common technical indicator in an atypical method. I was modifying the RSI indicator to use it as an odds enhancer to help identify whether trend would continue or if the supply and demand zones were strong enough to hold.
While discussing the indicator in my Minneapolis futures class last week, I decided to apply it to the broad markets to see if it had any use as a market trend predictor. Sure enough, the modified indicator did prove its worth.
As with any technical indicator, the RSI should be used as a confirming indicator, not a decision making tool. Price and supply and demand should be the only thing you use for your decisions to enter or exit the markets.
The RSI offered both positive and negative divergence signals to warn of trend changes before the 2008 credit bubble burst and the 2009 bottom. The trend changes were confirmed with the RSI moving below 40 (bearish) or above 60 (bullish).
Looking at the current S&P 500 chart shows a negative divergence that could be preceding a drop in the markets. The RSI has not dropped below 40 to confirm the reversal.
The large cap S&P 500 index may not be the best indication of potential market weakness. The Russell 2000 is an index made up of small cap stocks that generally have no international exposure. These companies are usually more sensitive to changes in the US economy and will turn faster than the large cap stocks.
Looking back to the 2008 market drop, you can see that the Russell 2000 warned and dropped before the large cap indexes did.
So looking at the current Russell 2000, we can see the weakness in the index from the negative divergence in the index and the indicator. This is a bearish sign for the equity markets.
So while the RSI indicator isn’t the Holy Grail, it can be useful to help find which supply or demand zones are more likely to work. To learn more odds enhancers, join us at one of our local centers and sign up for a class today.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD seems fragile below 1.1700 as Middle East war boosts energy prices
The EUR/USD pair trades flat at around 1.1680 during the Asian trading session on Tuesday, but broadly seems vulnerable, being close to its five-week low. The major currency pair is under pressure as surging oil prices due to the United States-Israel war with Iran have increased the risks of higher inflation for the Old Continent.
GBP/USD hovers around 1.3400 with bearish pressure intact
GBP/USD edges higher after three days of losses, trading around 1.3400 during the Asian hours on Tuesday. The technical analysis of the daily chart indicates an ongoing bearish bias, as the pair trades within a descending channel pattern.
USD/JPY struggles below 157.50 amid intervention fears, risk aversion
USD/JPY stays defensive below the 157.50 and over a five-week high set on Monday as a dramatic escalation of geopolitical tensions in the Middle East continues to benefit the US Dollar's status as the global reserve currency. The Japanese Yen also benefits from a risk-off market scenario amid looming FX intervention fears, acting as a drag on the major.
Editors’ Picks
EUR/USD seems fragile below 1.1700 as Middle East war boosts energy prices
The EUR/USD pair trades flat at around 1.1680 during the Asian trading session on Tuesday, but broadly seems vulnerable, being close to its five-week low. The major currency pair is under pressure as surging oil prices due to the United States-Israel war with Iran have increased the risks of higher inflation for the Old Continent.
Gold weakens below $5,300 as sustained USD buying counter Middle East tensions
Gold attracts some intraday selling and falls around $100 from the daily top, around the $5,380 area. The US Dollar climbs to a fresh high since January 20 and turns out to be a key factor exerting downward pressure on the commodity. However, concerns about a broader regional conflict in the Middle East continue to weigh on investors' sentiment and underpin demand for the traditional safe-haven bullion.
GBP/USD hovers around 1.3400 with bearish pressure intact
GBP/USD edges higher after three days of losses, trading around 1.3400 during the Asian hours on Tuesday. The technical analysis of the daily chart indicates an ongoing bearish bias, as the pair trades within a descending channel pattern.
Stellar risks deeper losses as derivatives metrics turn negative
Stellar is trading red below $0.16 at the time of writing on Tuesday, after a slight recovery the previous day. Weakening derivatives data caps the recovery, while an unfavorable technical outlook projects a deeper correction for the XLM token in the upcoming days.
The market is not panicking it is repricing the probability distribution of Oil and time
At the end of the day, markets do not trade morality or geopolitics. They trade transmission channels. And the only channel that truly matters in this maelstrom runs through the price of energy and the time value of money.
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