Thursday, February 27, 2003
using Median Lines on RSI
Last January 2002, "Dave", a member of the yahoo MedianLine group, shared some very interesting ideas about RSI and particularly how Median Lines ("forks") can be used as a timing device. The gist of his revelation is, to paraphrase,
- the ML represents velocity (ie, price-time),
- RSI, and similar indicators, represents acceleration,
- as such, RSI "leads" the ML by a half-cycle.
It isn't necessary to know this in order to use his idea, but there may be a few who are interested.
I've often used this method and using today's SPX 15m chart, thought to jot down notes using a real-life example. For each price fork there is a corresponding RSI fork. Because RSI oscillates, this is straight-forward as RSI tops/bottoms are more obvious. Dave suggests using an RSI multiple of 7, but I haven't noticed that this is necessary for intraday work. So, having drawn the corresponding price & RSI forks, one then watches each for a failure, ie, inability to reach the next "balance" point. These "failure points" are potential pivots from which a new fork can be drawn. As price plays out, the new forks will either work or fail.
What is evident from the chart below is that yes, indeed, RSI fork failures are harbingers that a new fork is taking over. This is seen by looking at the blue fork labelled "4". Although price managed to reach the Median line, RSI failed to do so and reversed. This said that a new pivot was in the making and to watch for its reversal. The new pivot eventually developed into the orange fork labeled "5". This process again played out as the green forks came into play.
While one should remain open to what does happen (and not get wed to a scenario of what might happen), a modestly bullish open for Friday is suggested as price broke through the orange RSI fork, which is stronger relative to price, which is still within the orange fork (a positive divergence) .
If this all seems complicated, it's no more so than any other system.... once you've mastered the use of the tools. As I've said many times, practice by doing, repeatedly. It begins to make sense after a while (a long while -lol). Good luck!
Labels: bisects-forks-medianlines
