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
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Gold: Volatility persists in commodity space
After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.
AUD/USD eyes 0.7050 hurdle amid supportive fundamental backdrop
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms
US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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