A Stock Market Timing Secret Revealed
Saturday, August 1st, 2009A Stock Market Timing Secret Revealed
Relative Strength Index (RSI) is a well known and much used momentum indicator. It was invented by J. Welles Wilder Jr., a great technical analyst.
RSI compares the magnitude of a stock or index’s recent gains to the magnitude of it’s recent losses and that information is turned into a number that ranges from 0 to 100. A single parameter is used, the number of time periods for the calculation. 14 periods is recommended by Wilder.
Common practical use of RSI in stock market timing is to measure the underlying strength of the market and samle job application letter for nurses to determine if it’s getting overbought or oversold. Wilder’s own recommendation was to use 70 and 30 levels, to indicate an overbought and oversold market, respectively. If RSI rises above 30 it’s considered bullish for the stock or index. If the RSI falls below 70, it’s a bearish sign.
Bullish & Bearish Divergences
Stronger buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and underlying prices. For example, a falling market index whose RSI instead rises from a low point of 10 and back up to above 50. The underlying index will often reverse it’s direction soon after such a divergence. Divergences that occur after an overbought or oversold reading, usually gives more reliable signals.
Center Line Break
A bullish or bearish indication is given with readings above and below the 50 level. A reading above this center line indicates that average gains are higher than average losses. A reading below 50 indicates that bears are winning the fight. For confirmation of bullish and bearish signals, some traders look for moves above and below 50, respectively.
Below is the author’s special indicator combination and settings, for short & medium term stock market timing.
Daily Chart:
- 200 ema (exponential moving average)
- 89 ema (closing prices used for both ema calculations)
- RSI set at 25 periods with horizontal lines at 60 and 40
Weekly Chart:
- Walter Bressert’s Cycle10 plotted with horizontal lines set at 70 and 40
- MACD plotted with Signal Time Periods set at 5
By the use of a 25 period RSI on a
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