I'll give you a couple of examples of this RSI filter that I use.
Go to the ASK Research chart page.
askresearch.com
Select 'Daily Charts'
Select 'Linear', '12 months', 'Relative Strength' and '14' on the period for the Relative Strength.
hit the 'Save these settings' option.
Now type in the ticker AMZN.
What you will see is the 12 month daily price chart for AMZN with the RSI oscillator underneath the price chart.
Note on the RSI that there is a spike above 70 in early October. This RSI spike corresponds with a price spike at 90.
Next, look at the price spike in mid December. Note that the RSI spike, although above 70, is LESS than the RSI top in early October, whereas the price is significantly HIGHER.
This is the divergence I look for...the price spike is higher and the RSI is lower. RSI measures the stock's strength relative to itself. I look for signals where the RSI goes through 70. In this particular case, this is a sell signal. TWO humps, with a divergence between the price hump and the RSI hump...the TLC Double Hump Pattern!!
The stock's price has gone higher, and the RSI is not as strong, indicating a hidden weakness.
It is most accurate (on a sell signal) when the two RSI spikes are at, close to, or above, 70. It is less accurate when the RSI floats around above 70 for weeks and the dips and pullbacks are all above 70.
For a buy signal, you would look for the opposite, and the RSI below 30. I don't have time to search for a good example, but pull up Diamond Offshore, DO, and you will see the same pattern except the RSI is not below 30. But look at the pattern. There is a bottom in October, and then lower prices after that with 'less lower' RSI spikes, most recently in mid-December. The stock price is very weak, but the RSI is actually stronger. This is the signal I look for to tell me that the stock has bottomed out. In this particular example, I might have gone long in December at 31 dollars, because there is a "sorta" signal there (but not under 30 on the RSI)... the signal was later invalidated and the stock went lower. But there is a confirming signal recently, so I am pretty sure that DO has bottomed out...and I was in at 31 so I would not be worried.
This signal works on any time frame, from two minutes to monthly...works on MACD and stochastic too. If you watch any oscillator at all, look for this signal.
Check it out for a filter. If I am looking to bottom fish, and I see this pattern, it is a good confirmation. If a stock is close to a prior low, I wait for the stock price to go below the old low (everybody bails out, it's a dog) and check the RSI. If I see the right pattern, I look for an entry point. If I am long and see this sell signal, I get light. If I am long a stock and the indices form this signal, I do not go against the market unless I have a really good reason to.
In trading, I use this pattern to predict short term moves on the S&P index, the COMP, and the Dow. It is very, very accurate. I got a strong sell signal on both the S&P and the COMP yesterday. If you can access the 5 minute bar for yesterday, look and you will see it.
For example, if I am long going into the afternoon and I see the S&P fail to form a pattern that tells me that the index will turn and go south, I am more confident that the market will hold and go higher. If I am long and I see the double hump sell signal form on the COMP, I look for a place to exit the trade. The best trick is to go with a strong stock in a weak market that is ready to go north.
I can tell the market will turn, or predict the short term tops and bottoms on the index intraday.
You can too. Check it out. Very useful data. |
