Leavitt Brothers: Forget the Fundamentals

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	Accumulation/Distribution Line
	ADX (Wilder's DMI)
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	Volume Oscillator (PVO)
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RSI (Relative Strength Index)

RSI is an oscillator developed by Welles Wilder. It ranges between 0 and 100 and compares the magnitude of a stock's recent gains/losses with the stock's pricing action over a given time period (14-day RSI is most popular).

Like moving averages, traders should experiment with different time frames to see what works best for an individual stock.

Wilder recommends a couple uses for RSI…

• The RSI usually tops around 70 and bottoms around 30. This typically corresponds to a short-term top and bottom with the underlying issue.

• The RSI does sometimes form chart patterns with easily determined support and resistance. Often a breakout or down of the RSI will lead to a move up or down with the underlying issue.

• The most powerful usage is when a divergence forms between the RSI and the underlying. If a stock moves up and makes a higher high but the RSI flattens out and moves down, the stock very likely will reverse and drop. On the flip side, when the stock moves down to new lows and the RSI flattens out and starts to move up, a near-term bottom is probably not far off.

The most powerful usage of RSI is when a divergence forms. Here you can see the VXO was moving up but its RSI was flat. When this happens the indicator usually wins, and it did. VXO fell. The a positive divergence formed. VXO was trading flat while the RSI had started to move up.When the RSI bounced off support, so did the underlying index, and when the RSI made a higher high, the VXO did too.

This BWA weekly chart shows two negative divergences which both worked great. In both cases the stock was trending up while the RSI did not confirm the move. In the first case, the RSI was flat while the second scenario shows the RSI had already started to move down.

The middle of this chart shows a confirming RSI. The stock moved up and so did the indicator. Then the stock flattened out, but the RSI was more aggressive to the downside. The stock, as they often do, did as the indicator did.

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