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Complementary tools such as moving averages can confirm trading signals and help you stay in better touch with events. Pairing three- and five-day moving averages is my favorite supplementary tool. In our previous example, the moving averages would have warned you that staying with this buy-side trade was beginning to fight the near-term price trend. Such a situation is a reason to guard against becoming emotionally invested in any single trade.

In Figure 6, you would have entered the trade somewhere around $350.50 on either of the two days when the signal formed. Notice how many days during this downtrend during which we would have had to exit the trade without a significant loss. Once again, prices during the buy side day on March 11 have an impact on the RSI. The subsequent failure of prices to new lows the next day, March 12, continues the downward price trend and the uptrend in the RSI. On March 13, the RSI takes on a familiar look at the close and seems to be giving us a buy side trading signal (Figure 6). Should we try the trade again? The first time we tried it, the trend petered out but gave us a graceful way out; this time, the price and RSI patterns look more promising.

Ideally, this trading signal should produce a strong acceleration in price trend as in Figure 1 or a trading range indicating accumulation in Figure 3. If you don't see price trending strongly, begin to look for hints of faltering price acceleration. The narrow inside day of February 28 is an example. If price seems to be hesitating, sell-side pressure may still prevail. If a pattern that was unsuccessful the first time it appeared repeats itself as in February 25 and March 13, it's a fair indication that prices are headed lower. But when you see such a multiple signal formation, stand back and view it in the context of a larger pattern. Doing so will help you gauge when price support is really being seen.

In Figure 7, a chart of September 1982 lumber, we have another trading pattern failure. Our lowest close to date appears on June 28. Our price-RSI pattern appears June 21 through 24, including a failed recovery that makes for a broad RSI pattern, lasting this time for four days. On June 25, price closes at a new low as the RSI falls almost to its own support level. On June 28, price closes even lower, creating our now-familiar shallow, drifting RSI formation.

This price trend lasted nine days, but price acceleration for the first four days, June 29 through July 2, wasn't strong enough to carry price above the near-term highs of 155. The one-day price consolidation on July 7 gave way to better momentum for the next several days, July 8 through 12. Prices struggled to hang on through July 16, then gave up without ever gathering enough momentum to clear out the block of shorts and stops up to the 155 level of May 26. Such an RSI signal formation should result in a strong reaction or the trader should become wary.