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X-RAY

Price charts should cause ideas to percolate in your observant brain. Often, they cause too many ideas or, worse, too many questions. RSI helps with this problem by tossing out all the highs, lows, gaps, excursions to strange price levels and formations to leave you with a single line constrained between two limits.

In fact, in the days when I cut my teeth on my weekly delivery of daily price charts, before the blessing of personal

computers, I often covered up the prices just to look at the RSI graph without preconceptions. Thus, the Figure 1 seen here scrunches the bars down to innocuous size while emphasizing the movement of RSI.

Working backward by looking at the RSI line first, we can easily see the salient points of action: A, B, C, D and E. In each case, we see in hindsight that RSI turned at or around the top or bottom of the intermediate-term movement (28, 30, 26 and 15 days). Dropping point D, since it never got close to the target level of 30, we see admirable consistency in the length of the bond market swings, half of which is nicely close to the 14 days’ length I’ve used for RSI here. These values haven’t changed perceptibly since 1982.

Retreats from RSI extremes match price extremes well. The RSI X-ray gives a nice confirmation or even a clear signal that a change in direction has come.

FIGURE 1: BOND ACTION. An RSI set for 14 days ably picks off bond market turnarounds. The actual value chosen for RSI isn’t magical — your eye will adjust to how any value distills price charts into definitive pictures.

FIGURE 2: SUPPORT AND DIVERGENCE. Zooming in on Figure 1, as bonds hit support above 106, prices press downward as RSI’s lows start to rise. As the number of ups and downs starts to equalize during a spell around a given price level, RSI will head back toward a neutral value of 50.

FIGURE 3: INTEL TAKES RSI FOR A RIDE. Intel’s September 1996 breakout drives RSI to 82, but the oscillator recedes steadily during INTC’s advance, a good example of any oscillator’s inability to handle trend well.

Points C and D illustrate the strength of RSI’s divergence feature. Figure 2 inspects this more closely. From point C,

points b and c rise on the RSI graph, while the commensurate b and c decline on price. Nevertheless, RSI is correct; we’re not continuing downward but have hit support and even move to the upside some days later. Here, RSI is telling you the downward movement has come to an end, not that a reversal is necessarily imminent. The odds have shifted from down to flat or up. Point D portends similar news to the downside in May of the same chart.

Of course, this sort of indication is not infallible. Part of its effectiveness is the instrument selected. In the case of bonds (or interest rates in general), the size of the markets precludes instantaneous jumps to other levels. Thus, fluctuations even within major moves fit the design of an indicator created to pick up price oscillations. Inspection of the coincident price and RSI movement over some years is the only way to get a feel for this.