GREAT ARTICLE I READ ON TRENDING STOCKS

Let me give credit where credit is due since I don't want to be accused of plagiarizing. This article is from Options Trader magazine which you can get for free via email. Just Google Options Trader magazine and ask to be sent the e-mag. I have shortened the article and added my own layman's terms.

USING RSI IN TRENDS



Although it sometimes seems as if trends consist of smooth, orderly up or down moves, prices usually zigzag up and down even during strong trends. If the longer-term trend is up, price will rise from a shorter-term oversold state to an overbought state and back again, repeating this cycle until the market tops, then moves into a downtrend.

To spot opportunities to buy in an uptrend or short in a downtrend, we must first select a method to define the trend. The moving average is probably the most popular trend-defining tool, but it is not the only one. Knowing that, there are indicators that are used when stocks are not trending. These are called "oscillators." Oscillators are usually thought of as tools for identifying overbought/oversold conditions or divergences, not as trend indicators.

This difference allows traders to create simple definitions for trend direction, such as the one we will use here: If the moving average is rising, the trend is up; if the moving average is falling, the trend is down. Using the direction of the moving average to define the trend, we can then move on to the next step of qualifying the nature of intratrend price swings. We then use the oscillator of your choice whether it be the CCI (commodity channel index), Stochastic or the RSI. (In the article that talk about using the RSI, but the Stochastic is my personal favorite)



Let's use an example: ICE
Since October ICE had been above its 30 day EMA until it was broken in late February.

A proper buy point occurred when the RSI turned back above 50 after falling below it. This happened in early October, early November, early December, late December. After last buying in December, one would have held onto the stock until it broke under the 30 day moving average in late February.

My opinion right now is that the 30 day moving average may act as resistance as ICE "corrects".


A simple guideline can be derived from this information: If the 30-day moving average is rising and the RSI drops below 50, buy on the next close above 50; place your stop below your entry point. This is a good example of how an RSI can be used to identify swing trade opportunities in the upward zigzags of a rising trend.

Good luck trading.
JD