Bernanke speaks, RSI (5), and Lessons from the Hardwood

March 28, 2006

The market moved lower today after the Fed announced that it would increase interest rates by a 1/4 percentage point, marking the 15 straight increase. The fed funds rate is now the highest it has been in five years. The decline in the market occured not because of the rate increase (it was expected), but rather the lack of change in the Fed’s message, which leaves the door open for further rate hikes.

RSI (5) as a useful Technical Indicator

Vaughn Okumura, founder of the now defunct vtoreport, outlined the RSI Wilder (5) on his site and stated that it was one of his favorite short-term strategies. He kept a record on the site, and his gains from 2/21/97 through 2/03/06 were in excess of 384%. He achieved these remarkable gains by only trading the underlying QQQQ.

The Relative Strength Index (RSI), developed by J. Welles Wilder, Jr. is an overbought/oversold oscillator that compares an entity’s performance to itself over a period of time. It should not be confused with the term “relative strength” which is the comparison of one entity’s performance to another.

I intend on carrying on with his mission of educating the public on how to use this wonderful technical indicator by posting the status of DIA, QQQQ, and SPY. Occasionally, when other ETF’s reach extreme overbought/oversold territory I will mention them as well. I hope this helps those that are interested.

His trading guidelines were as follows:

Buy when the 5-day RSI closes below 30.0

Sell when the 5-day RSI closes above 50.0.

I have archived the RSI (5) overbought/oversold parameters to help you better understand when a given index is in overbought/oversold territory.

DIA - 29.2 (Oversold)
SPY – 33.3 (Neutral)
QQQQ – 43.7 (Neutral)

Daily Article of Interest

The Final Four is upon us and what better time to help you understand the intricacies of options, and more specifically, the greeks. Bill Feingold does a wonderful job with this analogy. Check it out!