INDICATOR_RELATIVE STRENGTH INDEX

The Relative Strength Index (“RSI”) is a popular oscillator. It was first introduced by Welles Wilder in an article in Commodities (now known as Futures) Magazine in June, 1978. Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder’s book, New Concepts in Technical Trading Systems.The name “Relative Strength Index” is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be “Internal Strength Index.” Relative strength charts that compare two market indices, which are often referred to as Comparative Relative Strength.
Interpretation
When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and 25-day RSIs have also gained popularity. Because you can vary the number of time periods in the RSI calculation, I suggest that you experiment to find the period that works best for you. (The fewer days used to calculate the RSI, the more volatile the indicator.)
The RSI is a price-following oscillator that ranges between 0 and 100. A popularmethod of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a “failure swing.” The failure swing is considered a confirmation of the impending reversal.In Mr. Wilder’s book, he discusses five uses of the RSI in analyzing commodity charts. These methods can be applied to other security types as well.
Tops and Bottoms.
The RSI usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart.
Chart Formations.
The RSI often forms chart patterns such as head and shoulders (page 215) or triangles (page 216) that may or may not be visible on the price chart.
Failure Swings.
(also known as support or resistance penetrations or breakouts). This is where the RSI surpasses a previous high (peak) or falls below a recent low (trough).
Support and Resistance.
The RSI shows, sometimes more clearly than price themselves, levels of support and resistance.
Divergences.
Makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI.
The following chart shows PepsiCo and its 14-day RSI.

A bullish divergence occurred during May and June as prices
were falling while the RSI was rising. Prices subsequently corrected and trended upward.
Calculation
The RSI is a fairly simple formula, but is difficult to explain without pages of examples. Refer to Wilder’s book for additional calculation information. The basic formula is:

Where:

Courtesy Copyright ©2003 Equis International.This content copyrights protected by Equis.com.

Read More

INDICATOR_PRICE OSCILLATOR

The Price Oscillator displays the difference between two moving averages of a securitys price. The difference between the moving averages can be expressed in either points or percentages.
The Price Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two user-specified moving averages. (The MACD always uses 12- and 26-day moving averages, and always expresses the difference in points.)
Interpretation
Moving average analysis typically generates buy signals when a short-term moving average (or the securitys price) rises above a longer-term moving average. Conversely, sell signals are generated when a shorter-term moving average (or the securitys price) falls below a longer-term moving average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these one- or two-moving-average
systems.
Example
The following chart shows Kellogg and a 10-day/30-day Price Oscillator. In this example, the Price Oscillator shows the difference between the moving averages as percentages.
I drew buy arrows when the Price Oscillator rose above zero and sell arrows when the indicator fell below zero. This example is typical of the Price Oscillators effectiveness. Because the Price Oscillator is a trend-following indicator, it does an outstanding job of keeping you on the right side of the market during trending periods (as show by the arrows labeled B, E, and F). However, during less decisive periods, the Price Oscillator produces small losses (as shown by the arrows labeled A, C, and D).

Calculation
When the Price Oscillator displays the difference between the moving averages in points, it subtracts the longer-term moving average from the short-term average:

When the Price Oscillator displays the difference between the moving averages in percentages, it divides the difference between the averages by the shorter-term moving average:

PRICE RATE-OF-CHANGE
The Price Rate-of-Change (“ROC”) indicator displays the difference between the current price and the price x-time periods ago. The difference can be displayed in either points or as a percentage. The Momentum indicator displays the same information, but expresses it as a ratio.
Interpretation
It is a well recognized phenomenon that security prices surge ahead and retract in a cyclical wave-like motion. This cyclical action is the result of the changing expectations as bulls and bears struggle to control prices.The ROC displays the wave-like motion in an oscillator format by measuring the amount that prices have changed over a given time period. As prices increase, the ROC rises; as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC.
The time period used to calculate the ROC may range from 1-day (which results in a volatile chart showing the daily price change) to 200-days (or longer). The most popular time periods are the 12- and 25-day ROC for short to intermediate-term trading. These time periods were popularized by Gerald Appel and Fred Hitschler in their book, Stock Market Trading Systems.
The 12-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/over-sold indicators, it is prudent to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.
The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular cycle. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.

I drew “buy” arrows each time the ROC fell below, and then rose above, the oversold level of -6.5. I drew “sell” arrows each time the ROC rose above, and then fell below, the overbought level of +6.5.
The optimum overbought/oversold levels (e.g., 6.5) vary depending on the security being analyzed and overall market conditions. I selected 6.5 by drawing a horizontal line on the chart that isolated previous “extreme” levels of Walgreen’s 12-day ROC.
Calculation
When the Rate-of-Change displays the price change in points, it subtracts the price x-time periods ago from today’s price:

When the Rate-of-Change displays the price change as a percentage, it divides the price change by price x-time period’s ago:

Courtesy Copyright ©2003 Equis International.This content copyrights protected by Equis.com.

Read More