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INDICATORS
A Wilder Variation
R
RSI REVISITED
UC n =
DC n =
Cn - Cn - 1
if C n > C n - 1
if C n <
- Cn - 1
C n-1 - C n
if C n-1 > C n
if C n-1 <
- Cn
PRELIMINARIES
Before moving on to the formula, I should note that the
possible values of one-day closing prices and the corresponding RSI values are in one-to-one correspondence. Suppose
that todays closing price for an equity is C0 and the value of
RSI for today is RSI0. If you know a priori the value of RSI for
tomorrow (and this value is RSI1), then you are able to find the
closing price for tomorrow. Moreover, if RSI1>RSI0 you can
expect C1>C0, and if RSI1<RSI0, you can expect C1<C0. The
reverse engineering tactic can be applied to all oscillators if
the value depends upon one and only one parameter (high,
low, close, open, or volume). For the highest accuracy, it
should only be used for the next price projection.
X = (k - 1) ADC 0
where C n and C n-1 are the closing prices for the days n
and n1.
In the sequence, the average up close of k periods [AUC(k)]
is defined to be the (2k1)-period exponential moving average of UC. The average down close of k periods [ADC(k)] is
the (2k1)-period exponential moving average of DC. The
RSI of k periods for day n then is:
RSI(k) n = 1 -
1
AUC (k) n
1+
ADC (k) n
RSI 1
- AUC 0
100 - RSI 1
C1 =
>0
if X -
C0 + X
C0 + X
100-RSI1
RSI1
if X < 0
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
APPLYING IT
RSI (14)
FIGURE 1: MONTHLY CHART OF THE HANG-SENG INDEX. From the RSI(14) you can see that there is strong
resistance at the 86.52 level. This means that if the market advances, the RSI may stall at that level.
RSI (14)
Date
Value
Open
11/30/1993
10,513.72
9,378.80
High
Low
Close
9,825.50
8,834.70
9,125.20
Price Chg.
RevEng R
RSI
-203.90
11,635.58
79.3864
FIGURE 2: HANG-SENG INDEX WITH REVENGRSI OVERLAID. Using 14 as the parameter for RSI and 86.52
as the RSI value, you can see that 11,635 is the projection for the following month.
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
If P is an indicator (such as the closing price of an equity, support and resistance levels for the RSI (see the black
or an oscillator, and so on), then the value of tomorrows P arrows).
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
RSI (14)
Date
Value
Open
03/23/1994
3,777
3,861
High
Low
Close
3,901
3,765
3,775
Price Chg.
RevEng R
RSI
-.121
3,647
50.64
FIGURE 5: DOW JONES INDUSTRIAL AVERAGE WITH RSI(14) AND REVENGRSI. Using 14 as the parameter
for the RSI and 39.82 as the RSI value, you see that the projection for the following week is 3,647.
THE REVENGRSI
AS A LEVEL CURVE
The RevEngRSI indicator may be used
to graphically show support and resistance levels for the market defined by
support/resistance horizontal levels of
the RSI. The reverse engineering curve,
when plotted on the price chart of an
equity or index, defines a level curve to
use the mathematical terminology. The
reverse engineering curve is a transformation of a horizontal line on the RSI
graph into a curve in the equity price
chart.
In Figure 11 you see the Hang-Seng
index plotted along with the RSI(14)
on a weekly graph. The blue horizontal line on the graph of RSI is anchored
at the 51.31 level, which was an important support-resistance level for the
RSI (14)
Date
Value
Open
03/31/1994
3,576
3,761
High
Low
Close
3,794
3,544
3,636
Price Chg.
RevEng R
RSI
-.139
3,643
39.09
FIGURE 6: WAS THE PROJECTION ACCURATE? The market declined to 3,636 and the RSI fell to 39.09, slightly
below the 39.82 level.
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
RSI (14)
FIGURE 7: TESTING THE TRENDLINE. Notice that the Dow Jones Industrial Average tested the trendline several times.
RSI (14)
65-period EMA of RSI (14)
FIGURE 8: WEEKLY CHART OF THE NIKKEI 225 INDEX. Here you see the RSI(14) with its 65-period EMA
plotted. Notice the significance of the EMA for determining support and resistance levels.
x:=(WildPer-1)*(ADC*value/(100value)-AUC);
RevEngRSI:=If(x>=0, C+x, C+x*(100value)/value);
RevEngRSI
AUC today =
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
RSI (14)
65-period EMA of RSI (14)
Date
Value
Open
02/10/1994
18,727.17
20,255.00
High
Low
Close
20,526.00
19,651.00
19,990.00
Price Chg.
RevEng R
RSI
P-EMA
-311.00
18,914.17
56.7188
49.3472
FIGURE 9: ADDING THE REVENGRSI INDICATOR. Using 14 as the parameter for the RSI and an RSI value
of 49.35, the projection for the following week is for the Nikkei to reach 18,914.
Stocks & Commodities V. 21:6 (18-30): Reverse Engineering RSI by Giorgos Siligardos, Ph.D.
RSI (14)
51.31 level
FIGURE 11: SUPPORT AND RESISTANCE LEVELS. The value 51.31 is an important support-resistance level
for the RSI(14). The RevEngRSI indicator overlaid on the Hang-Seng index uses 51.31 as the RSI value. When
the RSI value is greater than 51.31, the index is above the RevEngRSI, and when the RSI value is lower than
51.31, the index is below the RevEngRSI.
RSI (14)
67.11 Level
64 Level
Positive reversal
FIGURE 12: USING REVENGRSI WITH OTHER METHODS. Using additional tools such as divergences,
horizontal support and resistance levels, and pivots makes reversals visually clearer.
SUGGESTED READING
Brown, Constance [1999]. Technical
Analysis For The Trading Professional, McGraw-Hill Trade.
Wilder, J. Welles [1978]. New Concepts In Technical Trading Systems,
Trend Research.
RSI (14)
FIGURE 13: S&P 500 INDEX. Here you see the importance of identifying strong support and resistance levels.
You can apply this value to create a RevEngRSI indicator to project the next closing price.
S&C