By: Chris Rowe — March 8, 2019
There are two things we typically provide you with in our True Market Insider articles:
Today I'll put the ball in YOUR court, instead of outlining all the times throughout history that this has worked.
I don't want you to just trust me, when I say this works virtually every single time. But I will stand behind the very bold statement that, in fact, it does.
I want you to spend some time check this for yourself, because that small investment of your time is much more likely to drill this into your mind, permanently.
The bottom line is that we are extremely likely, once again, to call the next short-term market bottom. This article is meant to give you the "heads up" so that you're prepared when you see it.
Here's the backstory...
The stock market recently "washed out" any traders who, were they still around and able to sell, would end up standing in the way of a strong bullish advance. So you'll want to buy this first real dip while we're still in the early stages of this healthy bull market and those potential speed bumps are out of the picture.
The indicator we're about to discuss is a default setting on almost every charting platform.
If you spend 15 - 20 minutes getting a feel for the history of this indicator over the last 20 -- 50 years, you'll almost certainly add another few percentage points to your annual performance. So please don't just use this article as a one-time money grab. Use it as a "roadmap" to make steady profits, over time.
In fact, you might also want to find the historical buy signals this indicator has generated, and match those dates to the articles I've written, located in the True Market Insiders article archives.
Let's talk BRIEFLY about... the RSI.
The RSI is a momentum indicator. Even though the acronym stands for "Relative Strength Index", that's not exactly what it is. Technically, that's because it measures it's own current strength in comparison to (relative to) it's own recent strength.
But because this firm uses "relative strength" as the cornerstone of our investing success, I want to be very clear that: the RSI is not an indicator that measures the relative strength of one investment vehicle against another.
When the RSI, (bottom of the chart) moves from below 30 to above 30, it's considered an RSI buy signal.
There are a few different types of RSI. There's an RSI wilder, RSI simple, RSI exponential, and more.
Most people use RSI simple and it's often the only RSI available through a free chart service. RSI wilder is similar. But I use RSI exponential, which gives a heavier weighting to most recent activity.
You'll notice how, in my chart above the setting image, the RSI (exponential) was down near 28. Let's look at the RSI found on the very popular website, stockcharts.com.
The RSI they have is at 49.35.
During a strong uptrend, pullbacks in the price-chart tend to cause the RSI to pull back slightly below the mid-point (the "50-line"). So if you're using this RSI, I'd look for a strong reversal back above the 50-line as the "buy signal".
But I'll dive a little deeper into the possible price points where this market is likely to find support, by focusing on what are known as "Fibonacci Retracement Ratios".
We use this method by drawing a line from the recent major low to the recent high, then applying the ratios and 50% (since 50% isn't a Fib ratio but it is a common retracement level). Since the market was just extremely washed out, it's more likely the pullback won't be as strong, but we aren't in the business of forecasting or predicting -- just identifying likelihood.
Once we have this in the rear view mirror, it will give us guidance on how strong the next push higher is likely to be. The more the market pulls back, the less strong the following rally is likely to be. If we get a small pullback, that indicates significant strength in the market.
If I wanted to make a friendly wager with a friend at a cocktail party, I might suggest that a pullback to 2,706 is most likely. And the next level -- if that first level is violated -- would be 2,637. This level actually coincides with a very established price level.
I'd be surprised if we pulled back below that point, but 50% (2,582) is a common retracement level. But the key is to view a move in the "RSI simple" back above that 50-line, or the "RSI exponential" back above the 30-line, as the signal to get back in the game and BE BULLISH.