3 Dec

Technical indicators and the Relative Strength Index

WRITTEN BY Gordon Kristopher

Introduction

Technical indicators are useful for predicting stock trends’ direction. These indicators are derived by applying a formula to the stock price. The commonly used technical indicators are the Relative Strength Index (or RSI), stochastics, the Moving Average Convergence Divergence (or MACD), and Bollinger Bands.

Relative Strength Index 

The RSI is a measure of a stock’s overbought and oversold position. The commonly used RSI is a 14-day RSI. It refers to the 14-day stock price that’s used to calculate the RSI. The number of days used to calculate the RSI can vary.

Technical indicators and the Relative Strength Index

The above chart shows the RSI and stock price movement for General Motors’ (GM) stock.

The RSI calculation is shown below.

RSI = 100-100/(1+RS*)

*RS = Average gains/average losses

For a 14-day RSI, the stock’s 14-day price movement  is used to calculate average gain and loss. If the stock’s price increased for the first ten days and decreased for next four days, the stock’s price decreased.

Average gain = sum of absolute gain in ten days/14

Average loss = sum of absolute gain in four days/14

The RSI moves between zero to 100 levels. It’s normalized using the formula RSI = 100-100/(1+RS*).

When the stock’s price decreases for 14 days in a row, the RSI will show zero values. It indicates that the stock is oversold. When the stock’s price increases for 14 days in a row, the RSI will show 100 values. It indicates that the stock is overbought. The level of 30 is considered oversold. The level of 70 is considered overbought.

When the stock is oversold and at the support level, it could be used as an entry point. When the stock is overbought and at the resistance level, it could be used as an exit point. It isn’t recommended to use the RSI indicator alone for an entry and exit strategy. It’s advisable to use a combination of indicators and patterns for entry and exit signals.

Applying RSI concepts

RSI concepts can be applied to stocks like EOG Resources (EOG), Cabot Oil and Gas (COG), Devon Energy (DVN), and Chesapeake Energy (CHK). Most of these companies are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Latest articles

The total refiners capacity in the US is around 18.8 million barrels per calendar day. The refinery utilization rate in 2018 was 93%.

Today's Snap earnings (SNAP) are a textbook example of how irrational, or at least unpredictable, market reactions can be.

On October 15, Aphria reported its Q1 earnings. Although Aphria's revenue came in lower than expected, its EBITDA and EPS beat analysts’ expectations.

Back-to-back dismal quarterly performance and a downbeat outlook have kept analysts increasingly cautious about FedEx's (FDX) growth prospects.

Texas Instruments (TXN) reported disappointing Q3 earnings and guidance. Its revenue fell 11.5% YoY to $3.77 billion, missing the estimate by 1.3%.

On October 22, Sprint announced that its True Mobile 5G service covers 16 million people in nine cities. That day, Sprint fell 1.1% and closed at $6.35.