Smoothing
RSI and Trendline Violation
Trendline Violations and Pattern Completions
The RSI can also be used in conjunction with trendline
violations. Generally speaking, the longer the time span
for any particular period (daily, weekly, or monthly),
the better the opportunity for trendline construction.
I
mportant buy and sell signals are generated when trendlines for both price and the RSI are
violated within a relatively short period. An example of the RSI's capability to form
price patterns is three
situations in which it traced out a
head-and-shoulders (H&S) formation. Each one was
confirmed by a trend break in the price. Note how the
inverse pattern, formed involved
several false oversold crossover buy signals. However,
it was not until the pattern was completed that the
price confirmed any of this by rallying above its
3-month down trendline.
Smoothing the RSI
It
is a perfectly legitimate technique to smooth the RSI.
One of my favorite approaches is to smooth a 9-day RSI
with an 8-day MA. Because the fluctuations are not as
great as the raw data, the overbought and oversold lines
are drawn at 70 and 30, not at my usual default of 80/20
for a 9-day span.
T
his smoothing technique is very useful
from the point of view of flagging reversals when the
indicator moves beyond its normal overbought and
oversold extremes. This form of interpretation works
pretty well except in periods experiencing strong linear
up- or downtrends.
RSI Indicator - Smoothing RSI
and Trendline Violations