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 clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
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