Getting Started with Technical Analysis | Cameron May | 9-30-19
Good. Morning. And welcome everyone my name is Cameron May it's 11 o'clock Eastern, Standard Time on a Monday morning that, means it's time to get back into our ongoing series, of discussions, called getting started with technical, analysis, and over the course of the last several weeks we've been exploring, individual. Technical indicators, discussing, how they're constructed how they might potentially be used last, time we talked about Bollinger, Bands and I promised this time we'd be talking about RSI. The. Relative strength index that, was a question that popped up during the discussion I was, already planning on discussing it so here we go we, have about, 30 minutes we've set aside for this discussion today, let's. Dive straight into, it but first of all let me say hello to Dave, Michelle, rich, and Gerry and if everybody could just do me a favor say. Cameron, hey audio video looks good and if. You happen to be here for the very first time I want to welcome you as well and if. You're listening in on the YouTube archive after, the fact enjoy. The presentation, if you'd like to put it in your personal calendar too to join us on Monday mornings it starts at 11 o'clock Eastern, Standard Time alright, so first, thing we need to do let's pause to consider the risk associated are investing we'll set a specific agenda and then we'll get into the construction and application of, the, RSI, all right so. Any. Investment, decision you make in your self-directed account, is, solely. Your, responsibility. All. Investing, involves risk, we. Are going to be using real. Symbols. In this discussion please do not take that as a recommendation or endorsement of any particular security or strategy, and, while this webcast, discusses, technical, analysis other approaches. Including. Fundamental, analysis, may, assert very different, views all right a Thank You Michelle Darren Tom and Louise, or, it looked like Louis, perfect. Excellent all right so, here's what we're going to be doing today. We. Have three items on the agenda first, of all the construction, of the relative strength index, second. The application, we're gonna look for potential entry and exit signals show some examples and finally a repetition, we're gonna go through several examples, so, by the time we've accomplished, these three agenda items I want you to walk away with an understanding, of what. The RSI is and how it might be used all. Right so what is RSI, first thing that I want to do I'm going to add it to the chart so, you can see it visually and I think it makes it easier to make a connection to. The to the math of the construction, so I'm going to come up here to the Edit Studies, icon, click on that little that. Little beaker icon, and. Then just type in RSI. And. I'm, just going to choose there are several different. Variations. On their RSI theme I'm just going to choose the plain old RSI. Add. That and before. I actually, apply, it I do, want to customize, it just a little bit I'm gonna come over here to this edit gear, and. Let's make this a little bit thicker okay. So, right here where the width is set to one which makes a thin line on a chart, pardon. Me I'm, gonna make that as thick as I can and I'm. Also gonna change the two other lines. Associated, with this chart that oh it's known as the overbought and the oversold, line, there. We go we're. Just gonna click okay apply. And, there. We are so there is that now much, easier to, see. Indicator. So, let's talk about the construction of this indicator what exactly, is, it well here's the RSI format well let me open up some space down here. But. The RSI is actually, fairly simple in this construction and I think most of you be able to follow along with this if you need to come back and revisit, it on the archive I think that's okay, but, really the ark the RSI, is constructed. Using this, very jagged, line and then. Two horizontal lines, okay, the jagged line is the RSI line the, the purple. Line up at the top is known as the overbought, area or the overbought line the, purple, line down at the bottom is the oversold, line but let's talk about the, overbought, and oversold are really simple let's talk about the construction of this Jagan, line the RSI, line okay, and it, is constructed, using this formula it's 100, minus and then.
100, Divided by 1 plus average gain divided by average loss all, right so that sounds like a bit of a mouthful but it's actually a pretty simple concept. Let's. Suppose that you've looked at a stock or last and I'm going to use a specific number here over, the last 14, days. You. Let's let's say you've made this observation. Hey this stock has gone up. Only. Four times over the last 14 days but, boy they were big gains and the. Stock has gone down 10, times over the last 14, days but. Comparatively smaller. Moves downward what, might that reveal, about the stock that might not be otherwise. Obvious, if you're just looking at the total numbers of days up days now well. It may be there. Is some subtle, or some hidden strength, in that, chart that may not be otherwise obvious, if we're looking at a whole bunch of red and just a few green. Sprinkled, in there so the RSI, looks. At the size of, the gainers versus, the size of the loser's and those can alternate. But. It looks to see are they confirming, current, price activity or, contradicting. Current price activity and this is how it it, does that we, take the average percent gained over. A specific time frame and by default this one looks over 14 days that can be customized, according to. A traders preferences. But. It takes the average. Size. Of a game over the last 14 days and divides. That by the average, size, loss, over the last 14 days so let's let's, take an example here. Let's. Say over the last 14 days, the. Average gainer. Regardless. Of the number of gains number, of up days let's. Say the average gain is 3% and the. Average loss or losing day is only, 1% well. Here's what we do with this equation I'm going to grab this let's. Just copy it. And. I'm gonna paste it just below so we can leave the original one up here undisturbed. But. Let's start to plug in the numbers here let's say our average gain over, 14 days has been 3%. And the. Average loss has, been 1%. Well now all of a sudden this doesn't look like nearly, as intimidating. An, equation. What. I can now do is say well, 3 divided, by 1 is going to give me a value of 3 and, now. I can add that to 1. So. What's one plus 3 I already know that it's 4. 100. Divided by 4 is. 25. And. What. Does that give us as our ultimate RSI value. 100. Minus 25 is 75. So. Really as long as we know the percent gain versus, a percent the average percent gain versus. Average percent loss over the last so many days and again default is 14 we. Can complete. This calculation. So. Here, is here. Are some other observations. About this calculation. When, the average percent gain is larger. Than. The average percent, loss it. Produces, a larger. Number right. When, we add a larger, number to, one it, creates a larger. Denominator or, divisor, for the equation. What. That's going to do is produce a. Smaller. Number to be subtracted, by 100 and it's going to move the, RSI, value up closer, to the upper, side of the. RSI, range which. Is capped at, 100. Another. Observation about this, RSI. Value. Is that can never be below. Zero it can never be above, 100 it always starts, with 100. And then. It subtracts the product, of this formula, from, that and that product in this, equation, can never be negative. So. We're always subtracting, a positive number, from. 100 that, positive number can never be above 100 because. Of the construction, of the algorithm and. It can never be below or it can be it can never be negative so. It. Winds up constructing. This moving. Line. So. If you'll notice right now the current RSI, value is, 60, which which would indicate what over. The last 14, days for, our example, stock here Blackrock. It. Tells us that yes as the stock is going up it's also been having larger. Gainers, versus losers, not, just more but. Larger. Okay. So. Yeah. Paul is asking so how's this calculated, again the percent gain is close, to close I'm. Almost certain I can double-check that but I'm pretty confident, in that so let's let's, flip this equation. A little bit and let's, suppose let's grab this again. Let's. Copy that pop it in down here and. Let's. Just flip the script let's, say our average percent, gain over the last 14 days has only been one percent regardless, of the number of gainers.
And Then. Our average, percent, lose or, loser over. The last 14 days has, been three. Percent, so. Now we have 1 divided by 3 which. Is going to give us point. Three three, so. One plus point three three is going to give us actually I can just take out the plus there gives. Us one point three three and. Then. We're. Left with 100, divided, by one. Point three three. That's. Going to be about. Seventy, five. Okay. It's gonna be actually 75 point something, a couple of decimal, points if. You want to see that up here in the calculator, we. Could just take one hundred. Divided. By one, point three three. Yeah. Seventy five point one eight. All. Right but what's that going to produce for us as our RSI, value, 25. So, that value is going to change, typically. Pretty modestly, from day to day because. We're looking at 14, days of, activity, taking. The. Average percent. Game versus. The average percent loss so as you, move that forward. One day you're gonna have one day that drops off the back end one day that's added onto the front end it's going to change one. Of those variables, either. An, up day or a down day and the calculation, is going to change slightly but. When you plot all of those on a chart you wind up with this RSI, indicator. And. So. Technicians. Will sometimes, use this indicator, for. Confirmation. Other technical, suspicions, or it may be a standalone, buy, and sell signal. So. Let's look at that and let me see did I get out. Yeah. Paul says he's trying to rule out a zero in the code it could theoretically go, to zero. Right. If. We had all gainers or all losers there I suppose if it was all losers I guess. Can't. Go below zero can't, go above 100. You'll. Just never see that value outside. Of that range all. Right but if now. That we understand. The construction, of the indicator, let's talk about the application once again if you didn't follow that math that's totally, fine. You can go back and watch the archive I only do that because there are some some. Traders who like to know, exactly. The nitty-gritty, details how is this thing constructed, and then, we get to the. Potential application, well. The potential application. There a couple, number. One is to look for overbought, and oversold conditions. Number, two is to look for something that we call it divergence, so, let's talk about the overbought, and oversold conditions. And you probably have already guessed what those are since I've already discussed, discussed, these other lines so. Let's let's mention those what are these purple. Lines, well. You'll notice the. Lower is. Set at 30, meaning. If that RSI value falls, below, 30. It. May indicate that there's been such an imbalance. There's. Been larger. Sell, offs than. Gains. That. May present in the short term a buying opportunity, on. The flip side of that equation. If. There, have been if. There's been comparatively. Much stronger buying than selling maybe. The stock has exhausted itself in the short term, especially. If that's combined, with other technical. Assumptions. About the stock no support and resistance, areas but. So the the over bought, area, is when, the RSI value climbs, above 70, oversold. Is when it falls down below 30 and if, we pop back up here to our edit, studies icon, you'll, see right there, this, is revealing, to us the construction, of this, RSI, indicator right, 14, means that's a number of days that we're looking back or the number of candles, that we're looking back for up, days and down days, there's. Our overbought. There's our oversold.
All. Right so we'll just go back here click on OK again all. Right so let's talk about overbought, oversold. I, wasn't, part. Of the naming of it but I think it tells the correct technical. Assumption. When. The, when. The RSI has fallen below 30. Some. Technicians. May say we may see that as a short, term potential. Buying opportunity. Now. For some they might just look for it you know a value under 30 may. Be its own standalone, entry. Others. May, require that, be combined, with other technical, assumptions, for the chart so, for example, let's, suppose that, a trader was already looking at blk and. They. Notice this about the stock it, really seems to be hovering right. In that range of $415. Each time it pulls down it hits that and rebounds, upward it, hits 415. And rebounds upward comes, down in the neighborhood of 415, and again rebounds. Upward well, that's one piece of technical, evidence that maybe there's a price floor there a second. Piece maybe if. The, RSI, achieves, an oversold. Condition. Now. You'll notice it hit an oversold condition right there on the the the. First part of August but. Where was the stock relative. To, that support, level, it. Was still some distance above, that so, a technician, may look at that and and. Weigh those two pieces of evidence in balance and say you know what, we're. Not getting. A confirmation just, yet and so. Waiting for the next, oversold. Condition. That may be right down here, and. Now. We're starting to get close to that support, area and then. A final confirmation for some technicians is to look for that RSI, to rise back up above, 30, so. Yeah it requires a little additional patience, and sometimes that can require. The sacrifice, of some of the upside potential since we're not necessarily getting, in right at a bottom, but. We're looking for confirmation. So in this case if we were using that combination of factors, looks. Like the signal may have been right there on that green day and now was that a perfect, entry signal no it was actually a couple, of days where we went down from there and, actually. Over the course of the next few weeks, didn't. Really net much positive, movement, and even. Backed off, looks like about. Ten. Bucks you, know two or three percent. From. That low so is it a perfect indicator, nope I haven't, found a perfect indicator yet but.
That Is how the indicator, might be used and if we start to use history, as a guide, all, right there's an oversold, condition, that, seemed to be right at a support. Level and the. Confirmation came looks. Like right on that green candle, right about there. Okay. Dave. Says is there any reason for choosing 70, and 30 as the threshold levels Dave's that that was just the. Way it was originally constructed this is customizable. For some some, investors, that want let's say a stronger. Sell-off. Condition, or a, higher. Rally. Condition, they may move, those levels, to 20. And 80 going. Out much beyond that and you're gonna have a pretty, scarce, appearance, of, either entry or Agnon things that signals although they can although they can still happen, yeah. So. Just. A it's, gonna be a bit of a personal preference thing but, a good question all, right so that's a bullish, entry, signal conceptually, it might also be used as a bearish, exit, signal because if a trader were in a trade banking. On the stock going as low as possible and now styling and show signs of strength maybe. We use that as a bearish, exit, signal. Now. Let's. Look at the opposite what. About when we're in that overbought. Range some traders, may see that, as time to exit, bullish. Positions, or, maybe even enter, bearish, positions. Alright, so there's an example let's, look at maybe one or two others we, have. O'Reilly. We. Might see some conditions, here where we got down into that oversold, area it looks like that coincided, right about with this low that. Low, if. We, go back to previous. If we're looking for confirmation their. Old. Resistance, may be acting as new support so. Building. A technical, case for, an entry, when. Might the exit come this. One if. We're using, the. Appearance. Of a, red, RSI. An overbought, condition, as an exit that. In, this case would have had to require some significant, patience, just. Imagine, you're in a trade right here and it, seems like it's panning, out pretty well in early days in a month and a half later the stock, starts to sell off and you're waiting for RSI, please please, give me a sell signal, it. In, this case two, weeks a. Trader. May have been looking at profits, evaporating. Before. They started. To to. Grow. Again and we, finally get into that overbought, condition, and, so. That might, provide. An exit signal one. Other thing that a trader can look for is, previous. Resistance. Levels or previous, price ceilings, so there may have been a hint right there. Well. There was a previous eye and then. That was later, paired. Up here as the, iris I started soften, we were up near a previous, peak that one I don't, might, might. Take a little bit of squinting. To see that for some technical traders. Francisco. Says being over 60 can be good how do we differentiate if it's continuing, a momentum, or a trend trend. Change that's that's. A tough question Francisco. And again maybe, what a trader can do is compare, that or or. Add. That, to just other technical, suspicions, from your chart maybe previous, resistance it might be a price. Pattern, or a candlestick. Yep. So this, is where additional. Experience, may come into play now with with, all of that said is. There still a guarantee, that we're optimizing entry, or exit not necessarily, right, alright, so that is one, potential application, for. The, RSI. Oscillator. The relative. Strength index, there. Is another one this one's maybe a little less common. But. Let. Me show you let's. Let's use, maybe, syk, as, an example here's syk if. You were to describe the, trend of syk over, the last six months or so how might you describe that well. It looks like it's moving progressively, higher, from, left to right, more recently, softening. A little bit but still I, think, a trader might say that. We have at least equal. Lows, and equal, highs so. Maybe a stock that's just going sideways right. However. What's, been happening, with RSI. It's, really since we hit a peak right about here. You'll. Notice the RSI had a peak right there and it's, been coming down since. Then it's, been making lower highs. At. The same time effectively, a stock has been making higher, highs. You. See that, that. Is, what is known as a. Divergence. When. Price is going one direction and our technical indicator is going the other direction once.
Again It may be revealing. To us some subtle, weakness, that isn't otherwise obvious, there in the price chart what this is telling us is prices. Are still moving higher but. Where. Are we seeing the larger, moves. Are. They on the up swings or the down swings, it's. On the down swings. Yeah. So that is maybe revealing, some investor sentiment, counter. To, the current - of the apparent current trend of the stock so. A divergent, divergence, may be a sign of weakness and in, this case what, a trader might do is look for a break, of support. In. The case of a bearish. Divergence which, is what we would label this this, is hinting, at bearishness, when. It doesn't appear to be obvious on the chart a trader. Might look for a. Confirmation. In the form of a reversal, of the trend a break of that support, line. Alright, so there's one example of, a divergence there was another one let's. See I believe it was on ResMed. Yep. Here's ResMed. Apparently. Moving higher. I'm. Going to draw a line right across these lows in this case. And. This was this one's sort of an example of a conformation, we, have higher, trend. An uptrend, but, on the on, the, RSI. We. Have what appears to be a downtrend, so. There's been a hint at, a softening, of the trend but it took a while to really manifest, and in, this case we, had a break of a support line and then, that old support, acting, as a new resistance, that may be a signal of the start of a downtrend obviously, we don't know how this is going to play out until it plays out there. We go so we've had we've. Actually accomplished. What I set out to do today, let. Me read through this I know that some of you had some other questions. Paul. Says I use a specific formula, for RSI divergence okay. Paul yeah so these things can be customized, as I've shown you, francisco. Says you could say sy kid's been mostly. Staying above 50 has trended up since January that's what you're still working on okay yeah so, when. Looking at a divergence, we might look for some other technical, confirmation. Of a suspicion. That was raised by RSI, all, right so obviously this is going to take some. Practice right, what I would suggest you do at this point if you if your if, this your first introduction, RSI, and if. You're intrigued, by the indicator, because, that's this on a sales pitch for the indicator I just, move on from one indicator the next so we understand, how they're built how no how they might be used but. If you're interested in I would suggest you go to your paper money account. Look. For three, stocks try. To find three stocks in your watchlist showing. Overbought or oversold conditions. And then monitor those see. What happens with this stock I think that'll be interesting. All. Right. Dave. That's true the formula uses the number of high-low candlesticks, doesn't account for high-low stock price true. Yeah, we're looking at just percent. Gained or, percent lost on an average basis, over the time frame selected. Everybody. That's going to be it for me I I've. Accomplished, what I set out to do we talked about the construction, of RSI, the application. Looking, for entry and exit, signals and. We've. Gone through some current examples, so now it's time for some repetition, some time for some real learning that's, an application, I would suggest you go do this while it's fresh but, for. Now it's it's also time for me to set you loose if you're interested, in these sorts of things this is maybe a little bit more of an advanced, indicator, if you, like these sort of advanced charting techniques we actually have a webcast. On Fridays, except. Fridays, yeah it's Fridays two o'clock Eastern Standard Time, it's called advanced charting, techniques it's taught by Patton Lally two, o'clock Eastern Standard Time if you'd like to join it live or you can just watch the archives as you, can watch the archives on most of our live. Webcasts. Now. Coming. Up next though we're. Gonna take a little bit of a break and then we're gonna hear from Pat, yeah so Pat teaches a Friday class he, also teaches a class of 12:30 Eastern, on Mondays. And it's called trading with ETF, so if that plays a role in your portfolio, if you could see it playing a role in your portfolio, you, might, want to hang around for that so that's starting in just, about an hour so you got a little bit of a break to go digest, this, but. Everybody. Francisco. Says what is next. Week, Francisco, here's what I thought, there, is a teaser, of an oscillator, in our, menu here it's called the awesome, oscillator, does anybody ever heard of the awesome oscillator, it's in there we're. Gonna explore that next week all. Right that's not one that I've I've. Taught. About it a long time I think so. That's it the awesome oscillator, is what we're going to be talking about next week you can certainly, put it in your calendar to join me then but.
Between Now and then quick reminder, of the risks associated through, investing, risks. Are real here's, an overview of the Greeks if you happen to use options if you happen to use technical analysis for the trading of options in your portfolio. We. Use real examples, in today's discussion it's not a recommendation or endorsement, of those, securities, or those strategies, all. Right everybody I'm looking forward to talking with you next time about, the awesome oscillator, go enjoy Pat's. Class in an hour or Pat's. Other, webcast, on Fridays. And. Between. Now and next. Monday you're certainly invited to join me the regularly scheduled sessions one. Thing that I would definitely recommend, that you put on your personal, calendar keep, an eye on Wednesday, what's happening this Wednesday, we. Have our education. Day, we. Only do it a couple of times a year so. We. Construct. Some some. What. We think are some, interesting. Topics to cover we. Clear out our schedule, so we can dedicate our. Instructor. Resources. To deliver in our education, days and that's, going to include me. And James Boyd hosted, co-hosting, a discussion. On Wednesday of hedging strategies, I'd, love to have you there hey. But what you know what whenever I see you again whether, it's on education, day or some. Other class between now and next week we're just talking. About awesome oscillators, next week, whenever. I whenever that moment arrives I want. To wish you the best of luck happy, investing buh-bye.
2019-10-04 16:27
