Thursday, August 12, 2010

The Summation Index RSI Indicator

Trading is difficult and the odds are stacked against you. Any edge you can get when trying to figure out when to buy or sell helps. I have found the RSI on the New York Stock Exchange Summation Index ($NYSI) a helpful swing-trading tool for this ongoing equity bear market, which I believe resumed when the "flash crash" occurred in early May. I am currently short the S&P 500 using December expiration puts on the triple bullish UPRO ETF.

Simply put, when the RSI on the $NYSI reaches the 80-90-ish level in a stock bear market, it is time to consider establishing short positions and when it gets to the 10-20-ish level, it is time to consider closing them out. No one indicator is perfect, but this is a good medium term (1-3 month time horizon) indicator in my opinion (I made it up, by the way - more free original technical research from your pal at Gold Versus Paper). A picture is better than my words, so here's this "indicator" in action during the 2007-2009 bear market (a plot of only the RSI for the $NYSI is shown with the price action for the S&P 500 [$SPX] plotted on top of it):

And here's a slightly easier on the eyes and brain chart of the past 6 months with the RSI for the $NYSI plotted above the main $SPX chart and the $NYSI itself plotted below:

We'll see if it works out this time. I will be adding more to my short position on the first decent bounce (i.e. when the RSI gets over 50 on a 60 minute intraday chart of the S&P 500).

Gold remains firm based on its safe haven status - it continues to act as a currency. I am expecting some short-term volatility (i.e. BUYING OPPORTUNITY!) but sleep very well knowing I have a strong core physical Gold position. I remain wary of Gold stocks over the short term, as they continue to act weak relative to the price of Gold (though they continue to show relative strength compared with general equities as expected) and because I am still expecting a stock market melt down.

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