The Revenge Of The Indicators
Reverse Engineering RSI (II)
by Giorgos Siligardos, Ph.D.
Simplify price projection and get a clearer visual representation with these three indicators.
In the June 2003 Stocks & Commodities, I introduced the RevEngRSI indicator and showed how it could be used to project support/resistance levels for the price. In that article, I also showed that the curve of this indicator is a transformation of a horizontal line from the relative strength index (RSI) graph to the price graph, which carries the support-resistance attributes of the horizontal line of the RSI graph into support-resistance attributes in the price graph. In this article, I will discuss three more indicators that transform the trendlines and moving averages of RSI into curves in the price graph, simplifying the price projection method and improving its visual representation.
RevEngEMARSI and RevEngSMARSI
My June S&C article stated that:
If P is an indicator (such as the closing price of an equity, or an oscillator, and so on), the value of tomorrow's P that touches tomorrow's k-period exponential moving average (EMA) of P is exactly the value of today's k-period exponential moving average of P. If P is an indicator, the value of tomorrow's P that touches tomorrow's k-period simple moving average (SMA) of P is exactly the value of today's (k-1)-period simple moving average of P.
Using these rules and the definition of the RevEngRSI indicator, you can construct the following two indicators for a k-period RSI and its n-period exponential and simple moving averages. C denotes the closing price of an equity.
Figure 1: The Nikkei 225 index and 14-period RSI. The 65-period EMA of RSI(14) is plotted on the price chart. The RevEngEMARSI predicts what the closing value of the next week should be to push the RSI onto its 65-period EMA.
...Continued in the August 2003 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.