Relative Strength Indicator (RSI) Will Tell You When To Get In?

If the market does rally into year end, the question becomes: when do we get in?

The current sell-off has likely shaken the confidence of many weak hands. But a look at recent history shows us we may soon have a good buying opportunity. During long-term uptrends the Relative Strength Indicator (RSI) provides a useful tool in knowing when to “buy a dip.”

Here’s a chart of the S&P500 futures going back to 2010.

See image larger

As you can see, in the past three years, the RSI has given three buy signals on the S&P500. The strategy is simple. Buy when the RSI hits “oversold” territory (green on lower chart), then sell when it moves to “overbought” (red).

These three trades alone netted 15%, 14% and 9% winners. Trading just one futures contract on the S&P500 (which requires about $5,000 in margin) would have turnrned a total profit of a little more than $20,800.

I’m talking about this now because we may soon have another RSI buying opportunity. If you look at the RSI subgraph you’ll see the current sell-off has brought the indicator’s value down below 40. If it moves below 30, I’ll have good reason to believe the sell-off is over and prices should turnrn higher just as they have the past three times the RSI hit this level.

We should know more next week – stay tuned.

If you haven’t done so already read the Survive & Prosper issue on “November 6 Will Make NO Difference: Stock Bubble Crash is Cominged”

 

 

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.