Technical Indicator - RSI - Explained

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There are two kinds of participants in the market: Fundamentalists and Technicians. Fundamentalists call themselves as value investors, based on the belief that they can calculate the intrinsic value of a stock. If a stock goes out of favor, meaning the stock price falls below its intrinsic value (under-valued), they would buy it and hold it until the price returns to its normal value and then sell it for a profit. Probably the most famous value investor is Warren Buffutt.

The other school of thoughts is the technical investing. Technical investors believe that nobody knows the "intrinsic" value of a particular stock, stock price is often driven by fear, greed, news and rumors. On the other hand, they believe that any news and rumors will show up on the chart as price actions. So instead of pains-takingly look for a magic formula to explain why people buy one stock and sell the other, they just focus their attention on the chart, so they call themselves as chart-readers or technicians. They look for supports and resistances, try to determine if the stock is in the up- or down-trend and try to evaluate if a stock is over-sold or over-bought. Their investment decision is based on buy the over-sold and sell the over-bought.

While the chart reading can be a daunting job, but there are some technical indicators based on mathematical formula and equations gaining popularity recently. One of them is RSI - Relative Strength Index, which is briefly explained below:

A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine conditions of an asset. It is calculated using the following formula:



As you can see from the chart below, the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.



Successful investors usually look at both fundamentals and technicals in order to identify their ideal stocks.

Swimmer

Technical Master

** Stock-market indexes broke out, and rallied from their

recent consolidation areas. The Dow Jones and
Nasdaq 100 closed at new highs for the year, while
the S&P 500 is not too far behind. The Russell 2000
put in an impressive rally percentage wise (+2.39%),
but still has some ways to go before challenging its
2007-highs at approx. 855. (today's close: 827.74 )

The uptrend remains intact in the markets: here are
the new support levels:

SPX - 1530
RUT - 820 (82 on the IWM etf; which closed today at 82.03 )
NDX - 2100
INDU - 13900

Happy trading,

Mkt Swimmer

Technical Master

Source: Decision Point
Date: 9/21/2007
Title: NEW BUY SIGNAL
by Carl Swenlin

Ever since the market hit its correction lows in August I have written three articles, each emphasizing that the odds favored a retest of those lows (see Chart Spotlight on our website). As it turns out, we haven't had any decline that I would classify as a retest, and the market has broken out of a triangle formation on high volume. When the breakout happened, it eliminated any reasonable possibility of a retest, in my opinion. Sometimes the low odds take it.

One thing I have been cautioning about is to not get too bearish, because many of our key indicators had remained bullish. Another thing I should mention is that we should never get too invested in a forecast. I have watched as many of my bearish colleagues, after being proven wrong by the market, are still tying to justify their being bearish rather than trying to get aligned with the market. The market will eventually prove them right because, because, because . . . Maybe they will be right sooner than we think, but for now the market looks as if it will be moving higher for a while.

My bullish stance is due to our S&P 500 timing model having switched from neutral to a buy on September 13, three trading days prior to the Fed-induced market breakout. Also, prior to the breakout, about half of the market and sector indexes that we track with our primary timing model were also on buy signals. On the day of the breakout, the other half switched to buy signals.

The chart below shows the two components needed to generate a buy signal -- the Percent Buy Index (PBI) crossed above its 32-EMA, AND the PMO (Price Momentum Oscillator) was above its 10-EMA. Note that the PBI is only at 59%, but it is trending up, which is most important.



Bottom Line: The long-awaited retest did not materialize, and. in my opinion, the market has begun another leg upward that should challenge and exceed all-time highs for the S&P 500 Index.