Daily Commentary - Posted on Monday, February 22, 2010, 7:14 AM GMT +1

14 Comments


Feb Monday 22

Modified RSI(2), Buying Power and Intermediate-Term Outlook

During the last couple of sessions almost all major US market indices showed a remarkable strength concerning their ability to not only recoup almost all of their intraday losses (like on last Friday’s session), but to close above the open as well. For exemplary purposes: The Russel 2000 now posted a series of 8 consecutive sessions with a close above the open (a white candle).

I thought it would be interesting to check if – and to what extend, and as always from a historical perspective – this positive abnormality could provide a potential short- and intermediate-term edge, either on the long or the short side of the market.

In order to ‘quantify’ the markets (historical) strength with respect to a close above the open and/or above the midpoint of the session, I utilized Wilder’s Relive Strength Index, but with a minor adaptation:

The modified (2-day) RSI now will not be based on the change between the current and the previous session’s close, but measure the underlying’s performance (buying power) with respect to the midpoint of the session, means a close above the midpoint would represent a positive percentage-wise performance, a close below the midpoint a negative percentage-wise performance.

Wilder’s original formula: change = today’s close – yesterday’s close

Adaptation: change = (today’s close – today’s low) + (today’s close – today’s high)

Everything else (with respect to the computation of the Relative Strength Index) remains unchanged.

With Friday’s session, the RSI-High/Low(2) closed above 95 on five consecutive sessions, and closed above the previous session’s RSI-High/Low(2) the fivth day in a row as well.

Table I below shows the SPY‘ historical performance (since 01/01/2006) over the course of the then following 1, 5 , 10, 15 and 20 sessions (1 month later) assumed one would’ve bought the SPY on the close of a session when the signal (5 consecutive sessions with an RSI-High/Low(2) above 95) had been triggered in the past:

Interesting to note that although the SPY might take a short break from it’s recent upmove on Monday’s session (a modest pullback seems likely, but the SPY did never loose more than -0.75% on the then following session out of those 21 occurrences), any potential weakness at the beginning of next week will probably represent an intermediate-term buying opportunity. At least since 01/01/2006 (the last 21 occurrences), the SPY closed at a higher level (above the trigger day’s close) 5 sessions later on 18 out of those 21 occurrences, and 10 and 20 sessions (1 month) later on 20 out of the last 21 occurrences.

And chances that the SPY will post at least one lower close (below the trigger day’s close) over the course of the then following 20 sessions are more or less even only (57.14% to be exact, that means in 9 out of those 21 occurrences the SPY never looked back), significantly below the at-any-time (since 01/01/2006) probability for at least one lower closer over the course of the next 20 sessions.

In addition (besides the probabilities for a higher/lower close x sessions later in comparison to the respective at-any-time probabilities), historical odds are heavily lopsided in favor of the long side of the market: One month later (20 sessions), none of those 21 occurrences were among the top 10% of the worst performing at-any-time sessions 20 session later, while 4 (19%, significantly above average of 10%) were among the top 10% of the best performing at-any-time sessions.

So at least with respect ot the recent history, after possibly taking a short breather (if any), a resumption of the recent upmove seems more than likely.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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Comments (14)

 

  1. Kelvin says:

    Frank

    Should Adaptation: change = (today’s close – today’s low) + (today’s close – today’s high) actually be

    today’s close – (today’s high+ today’s low)/2 ?

    Based on your text description, it should be the mid point of the day ?

  2. Kelvin says:

    Sorry to come back again but Frank, shouldn’t the mid point be calculated without the 2X ? why do you multiple that by 2?

    • admin says:

      Kelvin,

      simply because I was playing around with O/H/L/C, and using the formula presented showed the best results. I’ll check tonight if -and to what extent- cutting the respective value in half will work as well (it should).

      Best,
      Frank

    • admin says:

      Kelvin,

      I run a quick check. Results are (almost) identical for both formulas. The multiplier of 2 doesn’t change anything.

      Best,
      Frank

  3. Kelvin says:

    I used the one without the 2X and it shows a huge number of trades with high percentage of winning on SPY but then I realize that I did not follow your code and it was late, so I may be wrong. I will check as well. As always, thanks for showing us the ropes

  4. Bill says:

    Hi Would you say that the DV(2)formulae for Metastock would look like this?

    x:=C-L;
    y:=C-H;
    P1:=Ref(x,-1)+Ref(y,-2);
    D1:=If(P10,P1,0);
    U2:=Mov(U1,2,E)/Mov(D1,2,E);
    RSI2:=(100-100/(1+U2));
    RSI2;

  5. Bill says:

    Sorry I meant RSI2 modified would look like this?

    x:=C-L;
    y:=C-H;
    P1:=Ref(x,-1)+Ref(y,-2);
    D1:=If(P10,P1,0);
    U2:=Mov(U1,2,E)/Mov(D1,2,E);
    RSI2:=(100-100/(1+U2));
    RSI2;

  6. Bill says:

    Sorry take 3 I think this looks more complete

    Any thoughts?

    x:=C-L;
    y:=C-H;
    P1:=Ref(x,-1)+Ref(y,-2);
    D1:=If(P10,P1,0);
    U2:=Mov(U1,2,E)/Mov(D1,2,E);
    RSI2:=(100-100/(1+U2));
    RSI2;

  7. Bill says:

    Hi

    After further thought I m unclear as to what is being compared to what

    Is the change actually Close minus the mid-point(MP())? You seem to be defining mid point for the change, but what I’m unclear about is what is it being compared to. Is it yesterday’s MP(), yesterday’s CLOSE, or today’s CLOSE?

    Regards

    Bill

    • admin says:

      Bill,

      sorry for the delay.

      Take a llok at ‘http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_index_rsi’ and substitute Wilder’s original ‘change’ (the delta between today’s close and yesterday’s close, exemplary Excel spreadsheet) by change = (today’s close – today’s low) + (today’s close – today’s high).

      Evereything else remains unchanged.

      Best,
      Frank

  8. […] the Dow is down until 3:30, then rallies into the close.  Certain indicators, such as DV2, or Modified RSI2, account for this by taking the daily high and low into account, something I think is significant […]

  9. […] 253 Posts those who wants some more detail plus metastock code can refer to this article Modified RSI(2), Buying Power and Intermediate-Term Outlook | TRADING THE ODDS – Stock market timing… Logic of your id, share here […]

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