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Strategies & Market Trends : Tech Stock Options
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To: Kevin who wrote (2752)6/20/1996 12:32:00 PM
From: Tom Trader   of 58727
 
Kevin on the interpretiion of RSI

We have had several conversations regarding this subject. My view, which I think is a variant of what Judy expressed, can be summarized as follows:

If you have price movement accompanied by strong momentum, the initial penetration of the upper or lower parameters used--say 25 or 75--is a very bearish/bullish sign. If it crosses 75-80 with strong momentum, then look to BUY on any pull-back. Depending on the momentum, this pattern may repeat a second time and then maybe a third time--in rare instances perhaps a fourth time. Each time this happens there will be higher prices but lower peaks on the RSI--an indication of falling momentum with prices diverging. This would then be the classic point to take a short position.

Using a 9 day RSI would produce this pattern mor often then with a 14 day RSI. This pattern was very evident with FORE although, the extent of the downward move could not be anticipated.

A more gradual move to extreme RSI levels will on the other hand lend itself to a more sudden reversal.

If you agree with the above, perhaps you could incorporate this into your review and use it as a screen to find stocks that may not quite fit into the 95 level but are still worth looking at using say the 80 or 85 level.
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