In trading, there are very few reliable technical signals, especially when it comes to predicting longer-term moves. Long-term shifts in direction usually come about due to fundamental changes in supply and demand, so past price action, the basis of technical analysis, is not a very reliable indicator. Some, though, are more reliable than others, and over the last two years there has been one signal for crude futures that has been worth watching. I wrote about it a few weeks ago, and is now close to being triggered for the fifth time in that period. It has been right, to varying degrees on all four previous occasions.
That signal is Relative Strength Index (RSI), or rather a slightly modified version of it.
RSI measures the strength of moves up and down in price over a given number of time periods. You don’t really need to know exactly how it is calculated, although if you do the information can be found here. Suffice it to say that it results in a number between 0 and 100 and that there are two signal lines, at 30 and 70. Crossing below 30 is considered to represent an oversold state, and therefore signals a buy, while above 70 signals the opposite.
Like all technical analysis, the biggest problem with RSI is that it can easily give false signals. That tendency can be reduced by looking for two successive crosses of the line and waiting to see a return to the “normal” band before acting. Then, if that fails take a small loss and if there…