Profiting from the RSI

At twopercentgoal.com, I am always looking to strengthen the program and use tactics that have a high success rate to generate profits.  I feel I have done just that creating another bullet in the gun.    For me, it must be simple, easy to explain, easy to identify and have a very strong record after back testing for the last year.  This strategy involves three tools.  The Relative Strength Index (RSI), the 50-day/200-day moving averages and the Moving Average Convergence Divergence or MACD for short.  These technical analysis tools are widely used and are considered standard when viewing charts trying to spot trends.  When all three are used together and provide confirming signals, the results are amazing.  It is as simple as 1-2-3.

Point 1. The Oversold RSI

When buying a stock, we have all heard the phrase buy low, sell high, yet somehow people do the opposite.  But how do you know if the stock has bottomed and ready for a turnaround?  Simple.  Look at the RSI chart.  Is the stock in oversold territory (ie below 30) and is it coming out of it?  That’s your first clue.  Just a quick word on the RSI, it is a momentum indicator measuring speed and magnitude of a stock’s recent price change to show overbought or oversold conditions.  But this signal alone does not tell the whole story.  You need confirmation which leads us to Point #2.

Point 2: 50-day/200-day Moving Averages

When buying a stock, you want the overall trend to be positive.  Why swim upstream?  Have the wind at your back.  OK enough with the cliches.  The 50-day/200-day moving averages give you the overall picture for the last year.  If the 50-day average is above the 200-day average, it is in an overall uptrend for the year.  Now you have two signals.  First, the RSI is coming from oversold, and the moving averages are bullish overall. But you need one more confirmation point and that is the MACD.

Point 3: Positive Intersecting MACD Lines

This is your final confirmation.  You want the MACD to intersect positively.  You want the faster moving black MACD line coming from negative territory and intersecting the slower red MACD line. The MACD measures two exponential moving averages showing momentum and potential reversals. 

When used together and used properly, these three points can show impressive results and strong profits.  You can sell short with this too.  Simply do everything in reverse.  Look for the RSI to be coming from overbought territory; you want the 50-day average below the 200-day average and ensure the MACD intersects negatively.

Look at the above chart for Delta Airlines.  The RSI came out of oversold territory in August of last year.  Its 50-day moving average was above its 200-day moving average, and finally, the MACD intersected positively August 15.  This is the day you buy it. The rest is history.  Notice how there were two times the RSI came from oversold territory, but the MACD did not confirm until the second instance.  You must wait for the MACD to confirm.

I have back tested this strategy with companies on the S&P 500 for the last year.  My goal was to reach a 2% gain within a week.  A loss was either a sideways chart or a new low that went below the previous low point.  There were 107 winners compared to 22 losers or roughly a winning 5:1 margin.  Going short there were 29 winners compared to 4 losers or a 7:1 margin.

Try this for yourself or I can do this for you.  Simply go to twopercentgoal.com and sign up for the daily email.  It is free for the first 30 days then $99USD/mo. thereafter.  If my picks do not show a profit for the month, I will refund your $99 but I cannot assume responsibility for any potential loses that may occur.  Good luck with your investments.

Cheers,

 Al

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