Sunday, September 21, 2014
Oversold and Overbought
Relative Strength Index (RSI)
Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend.
IOIPG : I am still holding this one ... recently shown good profits, and it reversed. At the moment, it is OVERBOUGHT as the RSI is above 70. So, it just means that we should be ready to take profits. With resistance at RM2.83, that will be a good level to exit.
While RSI is a good indicator for swing trading (buy when RSI at low and sell when RSI is high), it is not a signal for buying or selling. Also, I do not use RSI for speculative stocks such as Sanichi.
For those strong uptrend stocks, breakout into new high ... RSI will also at the high-level. Overbought. That is normal.
HapSeng : Take a look at this weekly chart. It has stayed overbought with RSI above 70 for so long, except for a week. RSI(14-week) at 90.2% now ... another long white candlestick will see RSI reaching a historical level.
FGV : This is a weekly chart, to show the sell-down. RSI at 28% now. So, it is considered as oversold. I bought at Friday, closing price RM2.55. The low is at RM2.46 now. If next week it rebounds, RSI will show an early sign of 'hooking upward' and out of oversold region. That will be a good level for entry.
I have maintained that RSI is just a momentum oscillator, and not a signal-indicator to buy-sell. We need to check on other technical signals. RSI low could easily go lower after a short rebound, it might dive further and its RSI could be at similar level(at lower price).
But, it is a good sign for us to prepare to make a decision, using weekly RSI : IOIPG (RSI 57%) is prepare to sell, HapSeng (RSI 90%) is to sell and FGV (RSI 28% ) is to prepare to buy.
I was checking on charts ... and found this chart is a good one to explain RSI-divergence.
I will share more about how to use RSI in our trades with my e-meeting group. This is a learning group through online, where I will explain my trades.
Those interested, do contact me (email@example.com) for details.