A popular market breadth indicator, the McClellan oscillator is one of the tools that MoneyShow's To...
How to Use RSI Beyond Momentum
12/29/2012 8:00 am EST
Andrew Cardwell describes how he uses RSI to gauge momentum, plus much more, on any time frame and in any market; including as a sentiment indicator.
Most people think about oscillators like the RSI or other indicators as pure overbought and oversold indicators or just measures of momentum. I’m here with Andrew Cardwell. The RSI isn’t just about momentum, is it?
It’s a momentum oscillator and depending on the time period, I mean I use it for everything, weekly, daily, monthly, hourly, fifteen-, five-minute charts.
Short-term to long-term run again?
It doesn’t change. A lot of people shorten up the time period. But all you’re going to do is get a wider oscillation in.
That just moves all over the place.
You might be 90 down to five, but what I like about it is what I call PRIMOTIS. It’s my acronym for Price, Momentum, Time and Sentiment.
Does the RSI cover all of those categories?
It covers all of it. You can see how price changes because basically oscillator is measuring the rate at which prices are changing over certain number of days or weeks or hours. The time element, you can look at the number of periods between bottoms or peaks in the RSI. Major lows, major highs, how many weeks it was if you’re doing cycle analysis.
As far as the sentiment indicator, if you see those range rules that we talked about earlier, it gets up to where it’s near 60, then it’s gone down again.
To give an example of that, there’s so much talk about sentiment and seasonality and whatnot, but the Relative Strength Index, the RSI, what you are an expert in, applies to the euro-dollar, for example. We saw a rally in the euro-dollar in late 2012, but it couldn’t break these 60 levels. That’s an indication that the enthusiasm, the sentiment, isn’t there either. It’s not just momentum.
Well, a lot of people gave up on it. But it had that big run up into the 147, 148, and then we started to see loss of momentum, a range rule shift again. One of the patterns I look for are these positive and negative reversal patterns. As far as the RSI gets more overextended at lower prices, so it’s more over bought than it was before.
But I don’t use the words overbought or oversold. I use the word over extended because the market is truly not oversold until I get the inverse or what I call a positive reversal.
Right, so it might have done something extraordinary or extended, but not necessarily oversold or over bought.
No, because the overall trend in the euro has been down since it hit that 147. I think you’ll see 110, 115 within the next year.
We couldn’t even crack 130, so what’s to say we can’t get above 130 in a somewhat bullish environment.
Well, we just had a negative reversal show up, one of these negative reversals show up, in the euro-dollar daily charts and it’s forecasting down under 125, 124. But, we get down under those levels, then you’re going to be testing the old lows at 118, 119.
Yeah, 115, below that.
Can we go lower than that? For the people out that there that watch the currency market, can we see 110 again?
105. We have to see 115 and 110 to get to 105. It’s going to take time, but as I said earlier with the volatility, there’s going to be an increase in volatility and a lot of people aren’t going to understand it. So, the targets for the euro. I still think gold, people will go to gold. Gold is basing again.
Silver, I think, will go over $50. There’s a lot of support at 32. I think looking out down the road, people talk about the quantitative easing, the money supply, and the debt. You look at the chart, you look for the range rules, and you look at the patterns. I even use with the range rules, I do a moving averages on RSI. If the RSI value goes below 40, that says the short-term trend should be down.
If a nine-period moving average goes below, it’s telling me the intermediate trend is down. That’s what we’re about to see in stocks.