A Unique Way to Interpret the Wilder RSI with NG

The Wilder Relative Strength Index, usually abbreviated RSI, measures the relative strength of a stock against its own price movement.  It is generally accepted that a reading under 30 indicates an oversold condition while a reading above 70 indicates an overbought condition.

Please, please note that oversold and overbought are conditions, not trade signals.  In addition, after I back tested selling an overbought DJI and buying an oversold DJI for the past ten years, I wound up with a catastrophic loss.

Now what we could do is try to find traditional price patterns in the RSI of a stock.  This method was pioneered by Martin Pring and consistently gives favorable results.  The most common patterns found in an RSI are the head and shoulders and the symmetrical triangle.

Take a look at our NG, which we are currently short.  Click on the picture to enlarge.

In the lower column, is the chart of the NG 14-period RSI.  There is a clear head and shoulders top, which has bearish implications.  At the time of that breakout, the price also broke out through the bottom of its triangle formation.  Add this to our fulcrum pattern that I explained in my original NG post, and we have a hefty weight of evidence that this stock is facing a major reversal.

Sorry I have not been actively posting in the blog as of late.  I have my market analyst exam tomorrow, and I have been studying like a fiend.  Wish me luck!

Happy trading!
~Christopher Diodato