OPAY Technical Buy Signals - Part 4 of probably going to be about 6 maybe

OK, in Part 3 I promised you Relative Strength Index (RSI) and that’s what I am going to give you - but this is delayed gratification - I am gonna tease you with Moving Averages first - you lucky people…..hmmmm. 

I love the RSI Indicator - it works really very well - and gives great Signals whether to Buy or Sell.

Moving Averages
Look at the Chart below. In the Top Window we have the normal Share Price Line with a few coloured meandering lines. The sort of nearly Flat Light Blue Line is the 200 day Simple Moving Average (200 day ma). The Darker Blue Line is the 50 day Simple Moving Average (50 day ma).

The Green Line is the 20 day Simple Moving Average (20 day ma) and the Red Line is the 10 day Simple Moving Average (10 day ma). I am only mentioning these lines so you know what they are - but in this Part of the Series I am not intending to dwell on them. However, please just note how the longer the period (number of days) of the MA, the flatter the line is - an often used expression is to say the flatter, longer period, MAs are ‘Slower’. 

In the same way, the Shorter Period MA lines tend to wiggly around more - they are ‘Faster’. So the 10 day MA is the Fastest and the 200 day MA is the Slowest.

I am not much of an expert on MAs - in practice I tend to pay more attention to MACD (Moving Average Convergence Divergence) which I will cover in another Part of the Series. However, there are a few things from this Chart I will point out:

• The 200 day MA (Light Blue) is moving upwards - this shows the Share Price is in an Uptrend over a sustained period of time (and remember that Longer Term trends dominate over Shorter Term trends).
  
• Look at what happened around June on the chart. The 10 day MA (Red) and the 20 day MA (Green) both crossed the 50 day MA from underneath and then continued ABOVE the 50 day MA. This act of crossing is a ‘Golden Cross’ (that may not be the Strict Definition, but good enough for our purposes) and you can see it had pretty good Predictive Power in this case - and the Bulls were happy.
  
• On the flipside, look at what happened in mid March ish. Here the 10 day MA (Red) and the 20 day MA (Green) crossed DOWN through the 50 day MA (Dark Blue) and the price moved BELOW the 50 day MA (Dark Blue). This act of Crossing is called a ‘Dead Cross’ (again, probably not a strict definition, but this is my Blog and I will call it what I like - ha ha).  So in this case, the Predictive Power was bad for Bulls of the share.
  
• Right, now look at just after October on the Chart - we got another Dead Cross - “Ooops, that’s bad isn’t it WD?”  It certainly was, and the Price has continued a move downwards ever since.
  
• Indicators like Dead Crosses and Golden Crosses using 20 day MA and 50 day MA are quite a late warning Indicator - by the time they Flash Buy or Sell, the Price has probably moved a fair few % which you will have missed if you only use these as your Timing Indicators.
  
• Now for something a bit more relevant to why I decided to buy. If you look at the 200 day MA (Light Blue), note how the Share Price tends to move down to this line and perhaps dip a bit below it (you can see this better on a longer term chart if you look at one - www.advfn.com should enable you to do such Indicators as MAs), but most of the time in recent years it has then turned around and started moving up again - so this Indicates to me that it was a good time to buy.
  

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Relative Strength Index (RSI)
The wait is over, you have endured MAs and now I give you your RSI reward………

I love this Indicator - it is just truly brilliant. It is sort of similar to the Momentum Indicator I covered in Part 3. Which reminds me, something I forgot to mention is that a good way of looking at the Momentum Indicator and the RSI is that they both measure the ‘Speed’ of a move. In other words, when we get a bit of an Up Wave (not Elliott’s !!), the Momentum and RSI tells us how Fast it is moving - the ‘Power’ of the Wave or maybe the ‘Force’ of the Wave. Sorry, if that makes no sense, it is hard to explain, but hopefully you will get a sense of what I am saying.

Look at the bottom window of the Chart above. Unfortunately it doesn’t really do RSI justice - if you can dig out a Chart elsewhere ( www.advfn.com is a good one) and look at a longer timeframe, you will see that the RSI line tends to move Up and Down (like the Momentum Indicator) between about 30 and 70 according to the Scale on the Right Hand Side.

The simple and beautiful logic of RSI is:

• When the RSI hits 70 it is getting OverBOUGHT.
  
• When the RSI hits 30 it is getting OverSOLD.
  

The extent of a move will vary from Stock to Stock - I generally find that larger and more liquid stocks and Indexes move quite tightly between 30 and 70 over long periods of time, oscillating up and down.

On smaller stocks, with lower liquidity and more extreme moves, you often see them oscillate between as low as 10 and as high as 90. But overall it is a magical indicator and very predictive.

So, in light of the above, on the Chart, the RSI had moved down to about 35 and had started to move up when I did my Buy. It was not perfect in that I would prefer to buy on a lower reading (30 or below) but other indicators were flashing ‘BUY’. Remember, I use a combination of Indicators - and not all will perfectly align.

RSI Divergence
Something rather cool I want to bring your attention to (god, Wheelie, you are such a Geek if you think that is ‘cool’) is the concept of RSI Divergence.

It should be quite clear from the Chart - if you look at the Short Thick Black Line I have drawn below the RSI line from the start of October, you will see it slopes quite sharply upwards. If you can enlarge your view of the Chart (Pinch and Expand on Tablet, Fone, or if on PC try pressing ’Ctrl and +’ at same time) you will see the little note I added in Dark Grey.

The ‘Positive Divergence’ (or Bullish Divergence would be a better name) arises because although the RSI is sloping upwards (as per the Black Line), the Price Line in the Window above is going sideways - so the RSI Line and the Price Line are moving differently, they are not in Sync. They are Diverging.

The beauty here is that such a Bullish Divergence is an Indicator that the Price is about to move up. In this case, there clearly was a Bullish Divergence. Sweet.

Hierarchy of Timeliness (HOT - new acronym, I just made it up !!)
In our Hierarchy of timeliness that I hinted at in Part 3 I think, RSI comes behind the Momentum Indicator. So the Hierarchy in order of Earliest Warning First so far is:

• Candlestick pattern
  
• Momentum Indicator
  
• RSI Line
  
• RSI Bullish Divergence (arguably this could be higher up)
  
• Moving Averages (I am talking about 20 day MA and 50 day MA here really).
  

OK, let’s knock in on the head there.

Food time for Wheelie,

Bye for now,

wd