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Reading this trading signal requires close attention to intraday RSI behavior in the final days of a downside price trend. Now, let's study a few examples of downside events to get a sense of the trade timing as well as a dose of confidence.

But first, let's look at one last element of this signal's pattern. As prices reverse direction and accelerate into a new trend, a group of traders holding short positions are forced to cover. Once this group is forced out, normally there is a consolidation for prices similar to that of October 28 through November 2 (Figure 1). Such a price consolidation can be used to add to an already established position or to establish a position within a price trend for which you have missed the initial trading signal.

Is this a fluke formation? Compare the price trend for December 1987 T-bonds on April 24 through May 20 to the rising support line drawn under the RSI for the same period (Figure 2). Again, price and RSI diverge. Note the telltale one-day recovery of prices on May 18, which is well within the downward price channel. After this isolated upside spike in the RS1, the RSI settles into its own rising support zone. New price lows hint at a trading signal.

Compare the two similar RSI formations in Figures 1 and 2, each clear examples of the RSI trading signal pattern. The price decline due to short covering on May 22-26, with a price consolidation of June 2-10, gives us another opportunity to get on board.

Can you rely on such information for making trading decisions? Compare the price trend for September 1992 T-bonds on February 18 through March 16 to the support line drawn under the RSI for this same period (Figure 3). Again, we have the divergent quality of price and the RSI. This time, the buy side price spike on March 9 and 10 lasts for two days instead of one. Prices then slump to new lows, and the RSI settles gradually into its own rising support zone. Compare the character of the RSI spike and slide in this example to Figures 1 and 2.

In Figure 3, the buy side price trend does not display the dramatic rally of our previous examples.

However, it does trace out a trading range for 21 days. The rally during the trading range was the longest in the bear market, and support held when the lows of March 16 were retested. This decline, which stopped short of making new lows, should have alerted you to another possible trading opportunity, once that becomes evident with the trend resumption after the consolidation of April 23 through May 5.