The RSI is undervalued at the moment, at least if you subscribe to Jim Rogers’ concept of Relative Strength Index (RSI). As I have pointed out many times before, and not just in this article, I believe that RSI, combined with Relative Strength Index (RSI) is an indicator of where the market is headed.
RSI is the best indicator for the time ahead and hence we need to take it seriously and understand what it means. As a point of fact, one of the greatest indicators to get bullish sentiment is RSI.
It is the market’s anticipation of future cash inflows and expenditures, which can be interpreted as an indicator of money management. Hence when the RSI approaches 100, the market anticipates that cash flows will increase, which tells you everything you need to know about future economic performance.
So, is the RSI indicator for buying and selling? Well, it can certainly serve as a leveraged buy and sell indicator.
When the market is trending lower, or in oversold territory, RSI does not reflect that the market is overbought. Consequently, it does not help in your decision making process to wait for the RSI to cross above a certain level. Instead, you should use the RSI to buy at such times to take advantage of short-term volatility.
Indeed, it is tempting to jump in and take advantage of the short-term market changes, but it is probably better to wait for the RSI to cross over to indicate that the market is undervalued. Because, in the long run, it is better to wait for a lower RSI than to go all in at the first sign of selling, i.e.
On the other hand, if you do decide to take the plunge at the first sign of selling, be ready for an abrupt reversal to oversold territory if the RSI crosses the 50 level. At such times, there is an obvious need to get out of the market quickly as there will be very little chance for any price recovery.
Now, the RSI is not perfect, but it is a useful tool to help you decide when to enter and exit the market. Hence, if you really want to be successful, you need to use the RSI correctly and in the long run, you need to use it effectively.
The stock market in New Zealand is currently trading at or close to its all-time highs and thus the RSI reflects this optimism. However, what is not so clear is whether RSI is a good tool to use for predicting the future and if so, how is it different from the following indicators?
For example, the Forex Zloty is basically the “cost of borrowing” of a currency, i.e. how much it costs to purchase a Zloty against one US dollar.
It has been shown that Zloty pricing is sensitive to current interest rates and thus, it is used as a mean to predict the current interest rate movement in the market. Similarly, the Euro/USD indicator is primarily driven by interest rates and so, it is used to predict a certain interest rate move.
All three of these are also used as means to predict the future direction of interest rates, which is exactly what RSI is best at. Hence, byusing RSI along with these other indicators, you can minimize your risks.