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It's possible to read price bottoms, but it's not often and it's not easy. Many different bottom formations exist, and being familiar with them helps you discover where you are in the architecture of prices. Whereas we have studied relatively clear-cut examples here, patterns are unfortunately not always so easy to decipher. Studying historical price events will help you understand of price behavior and help you recognize the various patterns early in their development. Technical tools such as the price-RSI formation should be accumulated and used in conjunction with other techniques such as money management to create a sound trading environment for yourself.

Even with that caveat, the RSI can help you determine how long to stay with a sell side position and when to reverse with a potential buy side price trend. It will also help you recognize whether the new trend is healthy with good acceleration. If you follow a trading index other than the RSI, the principles that we've studied here can still apply.

Paying attention to daily volume and open interest will also help you read these trading signals. Using other tools such as a pair of short-term moving averages or a second trading index meant to view prices from a different perspective might add to your confidence level. Some traders will need to study the calculations involved in the RSI to have confidence in it.

New supply/demand events can happen any time and send new information into a market, but the technical structure of prices is reliable enough for the careful and disciplined trader to be amply rewarded. No two price events unfold in exactly the same way. By viewing historical charts containing different kinds of price and trading index behavior, you have a way to visualize the potential end of a price event. You will discover as well many variations on these patterns and be able to recognize them even when they become obscured by short-term price events. You can then be ready when that last moment of price action finally completes the picture. When other traders have been lulled to sleep by relatively quiet price action or their inability to sense the changing character of a trading environment, your intraday index will be an alert ally, quietly hinting at support or resistance and an opportunity for the vigilant.

FIGURE 1: DECEMBER 1987 T-BONDS AND THE 14-PERIOD RSI. The basic RSI-price pattern for a bottom consists of a decline in price and an uptrend in the RSI. Look for an upward spike in the RSI, as on October 13, to alert you to a possible trend reversal.

FIGURE 2: DECEMBER 1987 T-BONDS AND THE 14-PERIOD RSI. The RSI-price reversal pattern is a price decline with diverging RSI and the upward spike (May 18) on the RSI.

FIGURE 3: SEPTEMBER 1992 T-BONDS AND THE 14-PERIOD RSI. The reversal pattern correctly alerted you to the market bottom. The upward spike in the RSl occured on March 9. This time the market did not rally sharply but traded in a range, retested the lows and then advanced.

FIGURE 4: JULY 1983 LUMBER AND THE 14-PERIOD RSI. This time the market traded in a flat range with the RSI trending slightly upward. The upward spike in the RSI occurred on March 23.

FIGURE 5: JULY 1986 LUMBER AND THE 14-PERIOD RSI. The RSI-price pattern does not produce the divergence between price and the RSI, but there is an upward spike in the RSI on February 3.

FIGURE 6: APRIL 1992 GOLD AND THE 14-PERIOD RSI. The RSI-price pattern produces a false signal in this example. An upward spike in the RSI occurred on February 12 and March 11.

FIGURE 7: SEPTEMBER 1982 LUMBER AND THE 14-PERIOD RSI. June 21 through June 24 produced the upward spike in the RSI. By mid-July the market faltered and a trader should consider abandoning the position.