This chapter’s purpose is to take the relative strength index (RSI) oscillator and showing you a nice and effective method of how to calculate price objectives based on it. It will have four different recordings so four parts for it, one that deals with the RSI as dividing the area it travels into different areas and showing you how to interpret them, a second part that will show you what a negative and a positive reversal means, and a third and a fourth recordings with examples on how to calculate the price objectives based on what I’ve showed you on the first two recordings.
Relative strength index is more than a momentum oscillator and its standard interpretation is that higher values than 70 are considered overbought and lower values than 30 are considered to be oversold. For the purpose of our analysis here I will use the standard /default values for the oscillator, that is the 14 period, but will add some new levels into the picture and will show you how to interpret them and how to take them into consideration.
A negative or a positive reversal is a sort of divergence, the difference being that this type of divergence does not appear at a top or bottom, but sometimes right in the middle of a trend, but when they come, than it give us an idea about a price projection based on the current information the market is giving us. This price projections should be viewed like the measured move for the continuation patterns are, meaning they are not mandatory to come, but if you want to have an educated guess about where price might go, than using this technique will clearly give you an idea. From my personal experience, try to go not for the whole distance projected, but settle for something like 61.8%-75% of the targeted price, as sometimes, the last pip seems to be the more expensive one.
For those wanting even more information about the subject I strongly recommend the Constance Brown’s book, “Technical Analysis for the Trading Professional”, McGraw-Hill, 1999.