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Minyan Mailbag: Short-Term Buy Setup?

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Editor's Note: The following article is courtesy Rennie Yang of Markettells.com. We offer this perspective as food for thought and in the interest of seeing all sides

A reliable short-term buy setup was triggered Wednesday - only applies to daytraders, but thought you might find it interesting - I discussed it briefly in my Wednesday column but expanded on it a bit in the piece below...

Thanks, Rennie Yang
www.markettells.com

Relative Strength Index, or RSI, was introduced by Welles Wilder in a Futures magazine article in 1978. It's a price-based overbought/oversold oscillator that ranges between 0 and 100. The only variable is the number of days used in the RSI calculation. Wilder recommended 14 at the time, and most technical analysis programs still default to a 14-day RSI.

While effective, we've found a smaller number of days makes the RSI a more responsive oscillator that can be very helpful for short-term timing. The 5-day RSI in particular can provide telling signals, especially when it remains in 'overbought' or 'oversold' territory for multiple sessions. That's the case currently, as the 5-day RSI for the Nasdaq100 has settled below 25 for three consecutive sessions.

Historically, this has been a good sign that selling pressure is at or very near a short-term exhaustion point. This indicates buyers will most likely be able to gain the upper hand (at least temporarily), thereby creating a short-term bottom. Since 1995, this pattern has occurred a total of twenty-four times, and in every case but one the Nasdaq settled at a higher level when the RSI closed back over 25 (typically within 1-2 days of the signal.) Recently, the stock market has been punished in a series of higher opens and lower closes. And from the looks of the overnight action, we're looking at another up open on Thursday. While selling the up open might seem like the obvious play, the extremely oversold conditions suggests the need to be particularly nimble given the limited downside potential and likelihood of a higher close.

Nasdaq 5-day RSI under 25 Three Consecutive Sessions
10/12/05... NDX ??? when RSI back over 25
06/27/05... NDX +1.0% when RSI back over 25 (one session)
04/18/05... NDX +0.8% when RSI back over 25 (one session)
01/24/05... NDX +0.7% when RSI back over 25 (one session)
01/06/05... NDX +0.5% when RSI back over 25 (one session)
08/09/04... NDX +2.1% when RSI back over 25 (one session)
07/16/04... NDX +2.1% when RSI back over 25 (two sessions)
08/08/03... NDX +1.3% when RSI back over 25 (one session)
05/06/02... NDX +10.5% when RSI back over 25 (two sessions)
04/26/02... NDX +2.1% when RSI back over 25 (two sessions)
02/07/02... NDX +2.7% when RSI back over 25 (one session)
09/07/01... NDX -12.2% when RSI back over 25 (seven sessions)
06/18/01... NDX +3.3% when RSI back over 25 (two sessions)
02/22/01... NDX +1.2% when RSI back over 25 (one session)
02/09/01... NDX +2.1% when RSI back over 25 (three sessions)
12/21/00... NDX +9.5% when RSI back over 25 (one session)
10/12/00... NDX +9.1% when RSI back over 25 (one session)
04/14/00... NDX +10.0% when RSI back over 25 (one session)
10/07/98... NDX +4.2% when RSI back over 25 (two sessions)
08/31/98... NDX +6.6% when RSI back over 25 (one session)
12/15/97... NDX +1.3% when RSI back over 25 (one session)
07/15/96... NDX +4.0% when RSI back over 25 (two sessions)
06/20/96... NDX +1.2% when RSI back over 25 (one session)
12/18/95... NDX +4.9% when RSI back over 25 (one session)
11/22/95... NDX +1.6% when RSI back over 25 (one session)

No positions in stocks mentioned.

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