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Lessons in Technical Indicators: Part 2 - RSI
How to use RSI divergence to complement your wave analysis
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By Nathaniel Williams
Mon, 15 Mar 2010 12:30:00 ET |
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The Shanghai Stock Exchange Composite is China's main stock index, and Elliott Wave International's Asian-Pacific Short Term Update gives you forecasts for this index three times a week. The index also provided editor Chris Carolan an opportunity to teach his subscribers about one of the three technical indicators he uses to confirm his Elliott wave analysis - the Relative Strength Index (RSI).
Enjoy this free lesson that comes from Chris Carolan's on-demand, online trading course "3 Technical Indicators to Help You Ride the Elliott Wave Trend."
RSI shows you the strength of a market move and helps you find overbought and oversold conditions. Chris Carolan uses the indicator to look for divergence -- instances when prices make consecutive highs or lows while losing momentum, as indicated by the RSI. When combined with an accurate wave count, RSI divergence can help you see if a trend is ending -- or if a new one is about to begin.
RSI divergence is better seen than explained. In the chart above, the two green dots on the price chart point to two consecutive new lows. Now look at the green RSI lines -- see how they are pointing up while prices moved down? Although the market hit new lows, it did so with less momentum than before. That's a divergence, and, in this case, it signified the end of the trend.
Now look at the two red dots at the top of the next upward trend. This time, the market made two small consecutive highs. The RSI, however, tells a different story. The momentum of the highs was far less than during the bulk of the rally. This divergence suggested that the trend was ending -- and, in fact, it did as prices fell sharply.
Identifying RSI divergences may take practice, and the indicator isn't a crystal ball. But you can see how practical it can be to help spot the end of a trend and supplement your Elliott wave analysis.
This is just one part of applying RSI divergence to forecasting your favorite market. You can learn more today in Chris Carolan's on-demand, online trading course "3 Technical Indicators to Help You Ride the Elliott Wave Trend." In this 42-minute video, you will learn Chris's favorite three technical indicators -- including the RSI. He shows you how to apply them using detailed charts, real-world examples and practical insights.
You can purchase "3 Technical Indicators to Help You Ride the Elliott Wave Trend" for just $49 here -- but please don't! Get it FREE when you start your risk-free subscription to one of the following services:
(Already a subscriber to Global Market Perspective, European Short Term Update or Asian-Pacific Short Term Update? View the trading course here.)