Thursday, April 2, 2009

Here we the top (RSI wedge)

I posted on march 26th, we would TOP on April 2nd, and the Bears are "toast" till April 2nd. Then TURN OUT THE LIGHTS for the bulls.

So far so good, as we are a heck of a lot HIGHER now, than then....

So who cares, whats next......

IMO we are most likely going BACK to retest the main rsi support line, or "back test" the green line which we broke out from. At the angle they are both at, they will intersect "confluence" in approximately 2 weeks. I will not try and guess, only respect the support and resistance lines it has already provided us.

Tomorrow is probably going to be a down day, but that's not something to get bearishly excited about. Why? The probability irregardless is that Fridays (especially the afternoons) have a high trend to be "profit-taking", so tomorrow is likely down in ANY conditions. (that trend is the same in bear weeks, when we go up on Friday)

I was asked about RSI wedge's on yahoo board, and i think the spx weekly chart can be helpful in that explanation, to a pretty good extent.

I love RSI as a trading tool, mostly b/c like any other oscillators it can only range between 0-100. So there is no chasing it all over the place.

RSI is commonly used as a tool to look for "overbought or oversold" conditions. However it's use in that is very minimal to me. If you look at a MONTHLY chart, you can see the RSI of the SPX stayed OVER 70 for 4 consecutive years. (ie a huge bull market). Bull markets are supposed to be overbought, as bear market's are oversold. (that's the whole point) So if one shorted the market, just b/c the rsi reached over 80, they would of been in for 3.5 years of severe pain.

So rsi to me is worthless in that regard.
(to look at the calculations for RSI, go to and type in RSI, the link is to the upper right of the blog)
The patterns (wedge's) it develops however, are not.
What the RSI is very good for is wedges, as it can NOT exceed 100, and it can not go under 0. So it develops many wedges, or patterns which can be used as great buy/sell signals.
So it creates at many times "wedge's", ie a series of lower highs AND higher lows, till eventually the wedge runs small and it breaks out or breaks down. THOSE to me are the most clear buy and sell signals, of any one single t/a tool.....especially when the wedge has many touches. As they say, the more touches, the stronger the trend.

They can be used on any time frame:
- a weekly chart should produce moves for a couple WEEKS
- a daily chart for a couple DAYS
- 60 min chart for a couple HOURS
- 5 min or 1 min chart for quick DAYTRADING on and so on. (THIS is a Key point)

If you look at the SPX weekly and the RSI annotations, you can likely see what i am referring too, as the past buy and sell signals.

We are now at a MAJOR rsi resistance, established from the spx peak of 1576.
- hopefully the past 2 minor SELL signals (pink,blue) are appreciated
- as well as the past minor BUY signal (green)
(those are past wedge breakdowns, or breakouts)


**Also FWIW, the 2 red dotted (sell) lines correspond exactly to the EWT's that i do follow as the start of (3) 5 and (5) 5 down. **

3 touches = a trend, and when that trend is BROKEN (to the up or downside) the moves are very strong.

We also came within 5pts of the 20EMA, something we have not been above on the weekly in 10months. (added resistance, even tho the rsi's mean more to me)

How am I trading the weekly rsi:

I'm selling the RED line (now)
and BUYING the Purple line (if/when it comes)

Simply respecting the rsi till it breaks out or breaks down, as in previous annotations.

.....I will try to add another chart, with the purest examples of rsi wedge's to best illustrate

The absolute BEST signals are when the wedge's breaks (annotated w/ green or red dotted lines)

- selling the TOP and buying the bottom is the 2nd best, which is what we are at right now. (selling the top)


Instead of projecting a price target, (since i trade off rsi more than price) the most likely scenario / target to me is that we go much much lower from here, till we get back to the major rsi support line. (that will likely take a 2-3 weeks, and thats a pretty hefty ways down)

(attached is also the Russell 2000 daily 1yr chart)

which to me is the "momentum index"..when the market is good, the russell is VERY good, when the market is bad the russell is VERY bad".....triple top RSI resistance established today.


  1. Thank you Erik, for all your work. If this breaks to the downside, you'll have to post when the RSI is giving another buy signal, so all can get out of short positions.

  2. Nice Erik. Tks for your nice work. Do you think that RSI trendlines apply to regular stocks as well?

  3. Thanks for sharing your work.

    Please post your target for the bottom turn for mid/late April, when you have one, OK?

  4. very generous of you to share the work

    all the best, xswa

  5. Erik, watch the yen - it is weakening again. Broke 100 this morning and is retesting it again. If it hits out, bull stampede.