FIN348 Introduction to

Technical Analysis
Lecture Notes

RELATIVE STRENGHT INDICATOR

(RSI)
70 and 30 are the most commonly used RSI levels for a
market considered to be "overbought" or "oversold",
respectively. Basically, the RSI is a measure of the strength
of a recent trend:
RSI is considered strongly bullish if the 14-day RSI exceeds 70 this
means the security has trended up strongly over the past 14 days.
Some would consider the security to be overbought at these levels,
and a potential selling point might thus be reached when the RSI
exceeds 70;
If the 14-day RSI is between 50 and 70, the security has moved up over
the past 14 days; however, the uptrend has not been very pronounced;
If the 14-day RSI is between 30 and 50, the security has moved down
over the past 14 days; however, the downtrend has not been very
strong;
If the 14-day RSI is below 30, the security has trended strongly lower
over the past 14 days and the RSI is considered strongly bearish. Some
would consider the security to be oversold at these levels, and an RSI
reading below 30 might thus mark a potential buying point.

As is the case with many price indicators, the RSI may

generate false signals at times. A market will not always
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turn when the RSI exceeds 70 or when it trades below 30.

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RSI
The following is a simpletrading systembased on
combining the RSI with our volume indicators:
When the RSI rises above 70, sell on a significant volume surge.
As a general rule, volume surges that appear during strong
index advances - (i.e., when the RSI > 70) - indicate potential
downside reversals;
Buy on a significant volume surge when the RSI drops below 30.
As a rule general, volume surges that appear during strong
index declines (i.e., when the RSI < 30) - indicate potential
upside reversals;
3. Ignore volume surges that appear when the RSI remains
between 30 and 70. Under such circumstances, market
reactions may be short-lived.

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Stochastic Oscillator
The Stochastic Oscillator compares where a security's price closed relative to
its price range over a given time period.
Interpretation
The Stochastic Oscillator is displayed as two lines. The main line is called "%K."
The second line, called "%D," is a moving average of %K. The %K line is usually
displayed as a solid line and the %D line is usually displayed as a dotted line.
There are several ways to interpret a Stochastic Oscillator. Three popular
methods include:
Buy when the Oscillator (either %K or %D) falls below a specific level (e.g., 20)
and then rises above that level. Sell when the Oscillator rises above a specific
level (e.g., 80) and then falls below that level.

Buy when the %K line rises above the %D line and sell when the %K line falls
below the %D line.

Look for divergences. For example, where prices are making a series of new
highs and the Stochastic Oscillator is failing to surpass its previous highs.

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Example 1
We drew "buy" arrows when the %K line fell
below, and then rose above, the level of 20.
Similarly, we drew "sell" arrows when the %K line
rose above, and then fell below, the level of 80.

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A'tiqah Rashidah binti Abu Samah

Example 2
In this example we drew "buy" arrows each time
the %K line rose above the %D (dotted).
Similarly, "sell" arrows were drawn when the %K
line fell below the %D line.

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Example 3
This is a classic divergence where prices are headed
higher, but the underlying indicator (the Stochastic
Oscillator) is moving lower. When a divergence occurs
between an indicator and prices, the indicator typically
provides the clue as to where prices will head.

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A'tiqah Rashidah binti Abu Samah

Rate of Change
The Price Rate-of-Change ("ROC") indicator displays the difference
between the current price and the price x-time periods ago. The
difference can be displayed in either points or as a percentage. The
Momentum indicator displays the same information, but expresses it as a
ratio
The 12-day ROC is an excellent short- to intermediate-term
overbought/oversold indicator. The higher the ROC, the more overbought
the security; the lower the ROC, the more likely a rally. However, as with
all overbought/over-sold indicators, it is prudent to wait for the market to
begin to correct (i.e., turn up or down) before placing your trade. A
market that appears overbought may remain overbought for some time.
In fact, extremely overbought/oversold readings usually imply a
continuation of the current trend.
The 12-day ROC tends to be very cyclical, oscillating back and forth in a
fairly regular cycle. Often, price changes can be anticipated by studying
the previous cycles of the ROC and relating the previous cycles to the
current market.
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Example
We drew "buy" arrows each time the ROC fell below,
and then rose above, the oversold level of -6.5. We
drew "sell" arrows each time the ROC rose above,
and then fell below, the overbought level of +6.5.

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