RSI & gold corrections

I like the momentum indicator RSI (Relative Strength Index) because it captures an important phenomenon of market psychology (and a phenomenon independent of "fundamentals"). An intuitive way I like to think about it is: "Over the past 3 weeks, who's been happier: bulls on the "up" days or bears on the "down" days?" In other words, the total number of up or down days out of the past 14 has no direct bearing on RSI; only the cumulative gains on the up/down days matter, whether those days be few or many. Thus, the slope of RSI over time gives you an idea of the changing relative happiness of bulls vs bears on their respective "happy" days.

Over the past 3 years, whenever gold has exceeded the "overbought" 70 RSI-level and then come down to near-oversold levels below 35 (see red line), its downward path has been capped to the upside by similarly-sloped trend lines (see black lines). Observe that every time the RSI has finally broken its black trend line to the upside, the closest "local" minimum preceding the breakout has coincided exactly with at an important price minimum, preceding a strong rally (see purple vertical dotted lines).

I'm watching the RSI. I'm confident the pattern will repeat, and gold is about to begin a strong rally. But, if the RSI does fall below the green trend line, be careful: that's another sign "things are different" now, and that patterns over the past 3 years may no longer be dependable.

1 comment:

Jeanne d'Arc said...

I like the RSI indicator very much. It was screaming 'sell' for silver back in April 2011 when it went over 80, and it's been screaming 'buy' for both silver and gold for a couple of weeks now.

I just wish I'd had more confidence to buy more than I did at the recent lows... ;-)