RSI Basic

Session 1 Disc A (00:00) - Intro

 RSI can be used:

o with all time frames (weekly, monthly, daily, hourly, 30-min, 15-min, 5-min)
o with all markets
o to identify trend
o to monitor that trend
o to identify a trend change when it takes place
 You have to be willing to put in the effort to study to learn.
 Three keys to success:
o Follow a the trading program, preferably technical
o Have the patience to wait for the right opportunity (You’re not going to trade every single
move in every single market every single day)
o Have the discipline to stay within the parameters of your technical work and the discipline
to stay within yourself, controlling your emotions.
 Don’t forecast the market, just read the market
 Everybody’s trading style is different. Find the style that works for you and don’t listen to others.
 The safest trading is to buy on pullbacks from the overall trend because you will get fewer surprises.
 To be successful:
o Identify a market that is going to move
o Identify the right time by recognizing value
 RSI can identify when price is above or below value
 Allows us be patient as the trade develops
 The RSI patterns identify:
 when a market is turning
 what the support levels are below it
 what the resistance levels are above it
 what type of action we should be taking
 where a market is now
 where a market has been
 where a market is going
o Approach trading as a business.
 Identify risk vs. reward
 Know you’re not going to make a million dollars by tomorrow.

Session 1 Disc A (21:00) - Basic Market Structure

 There are four major categories in a market (PriMoTiS)

o Price
 most people’s perception of the market
o Momentum
 swings back and forth
 as prices start to rise more people get bullish and buying momentum increases
  as price gets too high, the bears start selling and selling momentum increases
 monitor momentum in conjunction with price
o Time
 know how long the expected trade will take
o Sentiment
 measures how people feel about markets
 When you start to see everybody talking about a market and getting excited about a
market and 80-90% of the people polled are bullish and expecting higher prices,
then the market’s probably already run its course.
o Reward to risk ratios.
 you’re not going to win every time
 identify reward to risk ratios that are at least 3-4 to one
o Probability
 identify moves with probabilities of 60-70%

Session 1 Disc A (31:00) - Market Price Activity and Momentum Sentiment Index

 Price
o People’s minds interpret what goes on during the day relative to the previous close.
 Am I above or below it?
 Is the market price rising or falling?
 Is momentum increasing or decreasing?
 How much time is left before the closing bell?
o Most technical indicators are based on close because prices are going to move up and down
this line all period long but at the end of the day everybody makes the same decision of
whether to get in, stay in, or get out
 when the market sold off it probably stopped out a lot of people who were long
 when the market rallied it probably stopped out a lot of people who were short
 Basic Trends
o Up trends generally have higher highs and higher lows
o Down trends generally have lower highs and lower lows
o Resistance becomes support and support becomes resistance
 Works with price levels and trend lines

Session 1 Disc B (00:00) – Basic Market Structure and Overview (Cont.)

o When stuck in a horizontal range

 Can trade off support and resistance but has potential to breakout or whipsaw.
Andrew prefers to trade trends.
 Don’t try to pick a long-term direction
o Price cycles: Divide the range (price high minus price low) by 8 to get 12.5% levels that tend
to act as support/resistance
 The 62.5% and 37.5% are close to Fibonacci ratios which are popular retracements
 The 50% is also popular
 These levels work for price and RSI
o Close-only price charts may give a clearer picture for drawing trend lines
 o Volume increases in the direction of the trend
 Momentum
o Simple momentum: closing price today minus closing price X (10, 20, 40) days ago
 Notice above/below 0, trends (higher highs/higher lows, lower highs/lower lows,
indicates momentum), number of new highs etc. in a row
 Can sometimes move sharply across 0 and then back due to news
 Could come back to retest 0, use in conjunction with Fibonacci retracements
on price range, if it goes through the 50% maybe it will stop at the 62.8%
 Think: is most of the activity above or below 0?
o Rate of change momentum (as percentage): closing price today divided by closing price X
(10, 20, 40) days
o As momentum slows the price will still continue in the same direction
 Momentum will top/bottom before price
o Momentum is the power behind any market move.
 If price is moving up and momentum is dropping (lower highs), there’s no power
behind it.
 Look at multiple time perspectives (10, 20, 40)
o Simple moving averages on price close (20 for longer term, 10 for shorter term) to smooth
out volatility
 Also note whether price (sma1) closes above or below the sma20 and sma10
o Always keep an eye on the charts 1 time period longer than the one you’re trading in
 If you’re a daily trader keep an eye on the weekly (if intra-day or hourly then daily, if
3 or 5-minute then 15, 30, or hour)
 Trade the direction of the larger chart but enter off the smaller chart
 if the daily trend is up, buy the dips on the hourlies
 if the daily trend is down I want to be selling
 Time cycles:
o Calendar year and divisions of (weeks 52, 26, 13, 6.5)
o 9 weeks=45 week days=approx. 1/8th of the year
o 18 weeks=90 week days=approx. 1/4th of the year
o Cycles can shift or be off by 1 or 2 days
o measured from high-to-high, low-to-low, high-to-low, and low-to-high
o Note how they overlap and their endings align

Session 2 Disc A (00:00) – Basic Market Structure (Cont.), Definition of RSI

 Sentiment
o When a market gets overbought or oversold it can stay that way for a while. And just
because you hear the market is overbought and it’s too high doesn’t mean the market can’t
go higher.
o Use Range Rules on RSI
 Section 2 The Basics
o Use 14-period RSI on every chart, this will be the most accurate
 The 14-period oscillator is set at half a cycle length. (cycle length is 28 days)
  Bottoms are usually 28 days apart (think lunar cycle)
 For financials (treasury bonds, euros, T-bills, and stocks, and stock indices)you can
also look at 21 because stocks and financials are generally a little slower than
futures contracts and commodity prices
 For currencies, gold, silver, crude oil, you can also look at 25-period RSI (because
there’s a 50-day cycle that a lot of traders trade in the currency market)
 For hourly charts 14-period is fine but you can also look at 9.
 Less than an hour (30, 15, 5 min) you may want to drop it down to 9.
 With the 5-minute charts you might be looking at 7-period or 5-period.
o Keep an eye on one time period longer so that you’re not blind-sided
 If the weekly is down and the daily is up the market will be very choppy
 Daily charts are going to get overextended and go to new lows because of
the longer-term trend.
 Daily traders hold positions 1 to 3 weeks.
 RSI14 is the most consistent and reliable but:
 You can look at 3, 5, 7, 9 for a shorter-term traders
 7, 9, and 14 for intermediate
 14 and 21 for the longer term.
 if you want to you can go to 25 and even 45
 all show generally the same move but the amplitude will be different
 look for when they all line up together as a no-brainer
o RSI = 100 – (100 / (1 – (average of 14 day’s close up) / (average of 14 day’s close down)))
 Y-axis is proportional to the magnitude of the move
 Slope is proportional to velocity of the move
o Parameters of RSI
 For a 14-period RSI
 75% of the time the normal range is 70-30
o Value indicates the probability of a lower move
 In uptrends(higher highs/higher lows on price) the range is 80-40
o RSI reaches oversold at the 40-35 level
 In downtrends(lower highs/lower lows on price) the range is 60-20
o RSI reaches overbought at the 60-65 level
o Each time we come back up to 60 we see lower highs on price
o Each time we come back down to 20 we see lower lows on price
 A transition market may not get above 70 or below 45 but just resting. This
happens when a market that’s been in an uptrend pauses before continuing
up.
 A 9-period is going to go higher than 80, it may get to 85.
 A 7-period may get all the way up to 90 or 95
 Just because it’s above 70 or above 80 and it’s putting in momentum highs does not
mean that’s the end of the market.
 First thing to look at = range rules, second thing to look at = simple momentum
(above0/below0)
  Look at the 14 first as your guideline and then use your shorter-term time periods to
try and optimize

Session 2 Disc B (00:00) – Parameters of RSI

 Needs at least 6-9 months of data to be useful, preferably 1 year

o Identifying uptrends and downtrends
 RSI in 80-40 for uptrend, 60-20 for downtrend.
 Chart 2-16
 #1: RSI near 80
o Upper range of that 80-40 range.
o Overbought
o Price was in a sideways-to-up mode prior to #1
 #2: RSI went below 40, breaking out of 80-40 range
o Lower low in price is confirmed by lower low in RSI
 #3: RSI rally unable to go above 60 (indicates downtrend)
o Price retraces 50% of range from #1 to #2 (price cycle rule)
 #4: RSI tries to rally above 60 again but fails (indicates downtrend)
o RSI and price both lower than at #3
 #5: RSI confirms lower low in price from #2
o RSI is about equal to #2 so expect a rally since it’s rallied from this
level before
 #6: RSI rallies but again stops at 60 level (indicates still in downtrend)
o Price lower than at #4 showing lower highs (with the lower lows
from #5, lower highs and lower lows in price are a characteristic of a
downtrend)
 #7: RSI does not confirm the lower low in price from #5
o After #7 prices are working sideways to lower but the RSI is not
going to new lows so you’re starting to get a little bit more of this
divergence idea coming in
 #8: RSI unable to get below 40 level (may not be in a downtrend anymore)
 #9: RSI retests the 60 level
o Price is lower than at #6 but RSI is higher indicating negative
reversal
 #10: RSI unable to get below 40 level again (confirms exit from downtrend
shown at #8)
o Expect rally since close to level at #8
o Price has been moving sideways and RSI lows at #10 and #8 are not
near the levels of the RSI lows at #2, #5, or #7
 Should tell you the range is shifting
 #11: RSI breaks through 60 level and then holds twice
o Notable because didn’t do this at previous highs at #3, #4, #6, or #9
 #12: RSI broke through 60 and stops at 80 indicating range shift
o Higher high in price confirmed by RSI
  #13: RSI held 60
o RSI dipped a little below 60 but prices were going sideways
o Higher low in price but lower low in RSI compared to #11 indicating
positive reversal
 #14: RSI up to 80 again
o Higher prices confirmed by RSI
 #15: RSI above 80 indicating overbought but not saying that price cannot go
higher
o Stays above the 80 for a while
 #16: Sharp drop in price and RSI but RSI does not go below 40
o Higher low in price but lower low in RSI compared to #13 indicating
positive reversal
 #17: Higher high in price not confirmed by RSI (loss in momentum)
 Summary:
o From #3 through #8 and #10 the market is in a downtrend
o When #11 holds 60 then moves to 80 at #12 and again holds 60 at
#13 the range shift to an uptrend had taken place
 Chart 2-17
 #1: RSI holds the 40 level
 #2: RSI went through 60 but didn’t get to 80
 #3: RSI kind of held the 60 level
 #4: RSI held 60 after #3 but didn’t quite get to 80
 #5: RSI broke through 40 shortly
 #6: RSI held the 40 level after #5 but stopped at 60
o Price retraced 50% of the move from 4 to 5
o With 50% retracement resistance and RSI stopping at 60 you start
thinking the trend may be shifting down but we must wait for more
confirmation
 #7: RSI broke through 40 but didn’t get down to 20 before starting up again
o Also bullish divergence, lower price not confirmed with lower RSI
 #8: RSI couldn’t even get to 60 before selling off again
o RSI rallies but price moving sideways, resting period before
continuing down
 #9: RSI didn’t get down as far as #7 (higher bottoms)
o Bullish divergence with #7, lower price not confirmed with lower RSI
o Starting to see a shift
 #10: RSI doesn’t get below 40 / finds support at 40
 #11: RSI breaks through 60 barely, falls back, then breaks above again but
doesn’t confirm new price high (bearish divergence)
o RSI falls back to 50 (not 40)
o RSI breaks through 60 again but still not confirming new price highs
 #12: Higher lows in RSI confirm higher lows in price and finally higher highs
in price are confirmed by RSI
  #13: RSI doesn’t confirm new highs (bearish divergence)
o RSI still in upper part of chart
o When RSI hit 80 should have told you that the 80-40 rule was in
effect
 #15: RSI starting to have lower peaks while price having higher peaks
o 2nd attempt at new RSI high that failed while price did go to new
high
 #17: 3rd set of lower peaks in RSI (with #13 and #15) and 3 rd set of higher
peaks in price
o Normally when a market is ready to make an intermediate-type
move it doesn’t just go up to a high and collapse. You get 2 or 3
attempts at new highs like you had at 13, 15, and 17. Prices kept
going but RSI didn’t. Remember we said momentum turns before
price. It peaks before price or bottoms before price.
 Chart 2-20
 #2: RSI below 40
 #4: Lower RSI confirms lower price relative to #2
o Don’t get bearish here because RSI is so low
 #6: Higher bottoms in price and RSI but RSI also bottoming at 40
o Maybe the shift is in
 #7: Price started up, RSI started up
o Takes out highs from #5
 #8: New price high, new RSI high
 #9: RSI drops just below 60 before rallying up again
 #10: RSI and price take out the highs made at #8
 #11-15: was going back and forth but the RSI was staying above 60
o RSI makes high at #12 but makes lower highs at #14 and #15 as
price goes to higher highs (bearish divergence)
o RSI showing a loss of momentum
o Tone down bullishness (smaller positions, tighter stops)
 #16: new low on RSI and breaks through 60
o Creates positive reversal with #13
 #17: RSI peaks at 60 while price hits a new high
o This is a weekly but daily is probably around 70 saying that it’s
starting to get a little overdone and hourly is probably in the 80-40
range but also showing slowing momentum
 #18-20: Don’t get extremely bearish because of how low RSI is
 #25: RSI higher compared to #17 but price lower (negative reversal)
o Also couldn’t get above the price low at #16 (support becomes
resistance)
 #27: RSI holds at 40
o Now it’s in this tight 60-40 range
 Chart 2-21:
  Even though #21 and #23 are at the same level as #8 on RSI, they are going
to be lower in price because the RSI had run up from the 20 level
 Can use the price levels at #8, #10, #11, and #13 to be resistance levels for
the run up to #21 and #23

Session 3 Disc A (00:00) – Divergence and “The Signal Count”

 Divergence is just a minor signal representing non-confirmation

o momentum highs and momentum lows are the starting points for both bullish and bearish
divergences
o look for stacked divergences
o look for how many periods apart
o detours from the trend, not usually changes in the trend
 it just means the market is a little overextended and we should see a bounce in the
other direction, not necessarily a trend change
 bearish divergence shows up in an uptrend
 bullish divergence shows up in downtrend
 Chart 2-26
o Stars 6-11: RSI had sold off and started to make a bunch of momentum lows but they were
rising while prices were declining.
o In January, February, and March RSI had been above 60 making multiple momentum new
highs with prices going to new highs.
o We had a little attempt in late-March, early-April to where it almost got back up to the 60
level.
o In May and June the RSI barely got above 50. Prices were clearly in a downtrend.
 Chart 2-27:
o PointA1: Low in price, low in RSI
o PointA2: Lower low in price compared to pointA1 but higher low in RSI compared to point1
 Bullish divergence
 Price is indicating the market is going lower because it breaks through price support
but RSI disagrees (non-confirmation) because it did not reach new momentum lows
 More than 5 periods apart so it’s less significant than it otherwise would be
 16 days apart so this is more intermediate- to longer-term divergence
o PointB1: New highs in price and RSI
 RSI above 60
o PointB2: Higher high in price compared to pointB1 but a lower high in RSI compared to
pointB1
 Bearish divergence
 9 days apart so this is more intermediate-term divergence
o Divergences more than 5 periods apart will have an impact on what prices will do but are
not as important as those 5 or less
o Star: Price and RSI decrease but RSI stops at 40 level
 Bearish divergences occur in uptrends
 80-40 range rules occur in uptrends
  Also supported by trendline A from the bullish divergence
o Break through 60:
 Range rules 80-40
 Also breaks through trendline created from bearish divergence line B (negates the
divergence)
 Chart 2-30:
o ABC
 Period X: new momentum low in RSI with a corresponding price of 100
 Period X+1: RSI rallies and price rallies to 104. Signal count = 1.
 Period X+2: RSI falls and creates a higher low compared to Period X. Price falls to 99
and creates a lower low compared to Period X. Bullish divergence created. Signal
count = 2.
o DEF
 Period X: new momentum high in RSI with a corresponding price of 100
 Period X+1: RSI falls and price falls to 97. Signal count = 1.
 Period X+2: RSI rallies and creates a lower high compared to Period X. Price rallies
to 103 and creates a higher high compared to Period X. Bearish divergence created.
Signal count = 2.
 Chart 2-32
o Example of multiple bearish divergences in an uptrend
o Bearish divergence is usually a bullish sign
o From X to 7 you are losing momentum but you’re not yet ready to jump all over it unless you
want to be super aggressive.
 If in a downtrend, take partial profits on short positions when bullish divergence emerges
o If range rules (60-20) still in effect then probably just a short-term bounce but the
downtrend will most likely continue. If/when the downtrend continues you can add back to
your short position.
 If in an uptrend, take partial profits on long positions when bearish divergence emerges
o If range rules (80-40) still in effect then probably just a short-term bounce but the uptrend
will most likely continue. If/when the uptrend continues you can add back to your long
position.

Session 3 Disc B – Simple Positive and Negative Reversal

 If RSI pulls back to a higher low and price pulls back to an equal low we can still consider that a
divergence but would much prefer seeing a lower low on price
o If this happens recommend waiting one more period, unless I wanted to be real aggressive.
o If it were the same price then we should be turning, we should see a little turn up because it
says that it wasn’t able to go to a lower price but it’s equal to or less than.
 We want to identify divergences only because in the checklist that we’re building we want to know
whether it’s in an uptrend or a downtrend with a quick assessment. Positives and negatives tell you
when to buy or sell, whether the market’s in an uptrend/downtrend, and what price the market is
going to
 Complementary indicators: moving averages of RSI, moving averages of close, basic momentum
 On a longer-term bullish divergence your momentum is probably going to be below 0, same if the
trend is still down. It’s going to be a little short-term move before it turns down again.
 Positive Reversal (chart 2-37)
o Come in uptrends (with 80-40 range rule and bearish divergences)
 Should see around the 40 level
o 2-5 period is optimal, but >5 still confirms uptrend
o Day X: Momentum low in RSI
o Day 1: Price and RSI rally
o Day 2: RSI pulls back to lower low compared to day x, Price pulls back to higher low
compared to day X. Also to note price pulled back to 50% of day 1’s move. Momentum is
more oversold but price is higher than before.
 Negative Reversal (chart 2-37)
o Come in downtrends (with 60-20 range rule and bullish divergences)
 Should see around the 60 level
o 2-5 periods is optimal, but >5 still confirms downtrend
o Day X: Momentum high in RSI
o Day 1: Pull back in price and RSI
o Day 2: Rally in RSI to higher high compared to day X, Rally in price to lower high compared to
day X. Again notice 50% retracement in price from day 1’s move. The RSI got more
overbought going from 99 (day 1 close) up to 102 (day 2 close) than it was on the X day.
Market is burning itself out on the way up.
 A market that’s in an uptrend should show bearish divergence and positive reversals.
o Take profits on bearish divergences.
o Buy positive reversals.
 Positive reversals confirm bullish divergences
 Negative reversals confirm bearish divergences
o If we’re seeing an 80-40 range, and we’re seeing positive reversals, and all of a sudden we
see a bearish divergence followed by a negative reversal (negative reversals come in the
downtrends) it says that last bearish divergence that we saw was probably for real.
o If you see a negative reversal in a market that looks like it’s in an uptrend it’s saying that you
missed something, you better go back.
 Positive and negatives are much more important than all the bullish and bearish divergences in the
world but you should see positive reversals to confirm your uptrend, you should see negative
reversals to confirm your downtrend
 Chart 2-41
o Day X: Momentum low on RSI, although kind of hidden because wasn’t a new low
o Day 4: 5-period Bearish divergence - Higher close in price compared to day X-1 but lower
high in RSI compared to day X-1.
o Day 5: 5-period Positive reversal – Lower low in RSI compared to day X but higher low in
price compared to day X
o After Day 5: Bearish divergence from X-1 to 4 negated
o Day 11:
  Since day 5 was a positive reversal we can draw a price support at the day 5 price
close. Day 11 did not break it.
 6-period Positive reversal, 2 positive reversals in a row
 Draw a new support line on price at 11 or draw a trendline on price from X to 11. As
long as that market stays above the trendline then trend should be up.
 Chart 2-42
o Day 4: 4-period Negative reversal – RSI closed higher compared to day X but price closed
lower compared to day X
o And you can draw a little trendline connecting that close chart at the bottom.
o Day 5: sells all the way down below the 30 level on RSI telling you that the trend is still to
the downside.
 take partial profits down here because it may be a momentum low (oversold) even
though we’re still seeing negative reversals
o Day 6:
 RSI peaks at resistance line formed by negative reversal from X to 4, creating
another negative reversal between 6 and 4 as well as 6 and X
 Price doesn’t move up nearly as much and stops shy of support-resistance line
created at point 2. Note that bottoms are becoming tops.
 The first negative reversal you see confirms the bearish divergence, the second negative reversal
you see confirms the first negative reversal, and every negative reversal after that should show you
that this thing is continuing to work lower unless you’re starting to see bottom-top negatives and
then you know it’s really going to get nailed.
 Target setting (Chart 2-43):
o Positive reversal:
 Day X: Momentum low on RSI
 Day 1: Rally in price and RSI
 Day 2: Positive Reversal – lower low in RSI compared to day X but higher low in price
compared to day X
 Positive Reversal Target = Day 2 Price minus Day X Price plus Most Recent Price Top
prior to X = 118 – 115 + 120 = 123 or higher
o Negative Reversal:
 Day X: Momentum high on RSI
 Day 1: Pullback in price and RSI
 Day 2: Negative Reversal – higher high in RSI compared to day X but lower high in
price compared to day X
 Negative Reversal Target = Day 2 Price minus Day X Price minus Most Recent Price
Bottom prior to X = 121 – 123 – (-118) = 116 or lower
 In addition to the negative reversal pattern, if shorter-term moving averages were
below longer-term moving averages it would be what would be considered a
confirmed or enhanced negative reversal signal. If the moving averages were
pointing up it would be what I call a naked signal.
 Chart 2-44 – Bonds Feb93-Jul93
o Line D resistance: Bearish Divergence
o Point 1: Positive Reversal, creates long-term price support level
 o Line D resistance negated
o Line E resistance: Bearish Divergence
o Point 2: Positive Reversal, also at 40 level, creates long-term price support level
o Point 3: Bearish Divergence, creates new trend line
o Line F resistance: Bearish Divergence created at Point 3
o Point 4: Price support from point 2 holds but can draw another price support line here at
108
o Point 5: Line F resistance negated and then used as support, draw another price support
here, move up stops underneath that price support, trend is up until a price support is
broken

Session 4 Disc A – Positive & Negative Reversal (Cont.), Trend Analysis

 Chart 2-45 – Dollar Index Mar92-Sep92

o Point 3: Forms bearish divergence with Point 1
o Point 4: Lower high on price and lower high on RSI
o Point 5: Lower high on price and lower high on RSI
o Point 7: Starting to make lower highs on a longer-term basis
 RSI didn’t get above 60 before turning down so draw horizontal resistance line on
price
o Point 10: Almost forms a negative reversal but not quite
 Draw horizontal resistance line on price anyway
o Point 12: Forms negative reversal with Point 10
 RSI tops at 50 level
 Negative reversal confirms price resistance at Point 10
 Can draw another horizontal resistance line on price here
o Point 13: Forms bullish divergence with Point 11
 Tends to come in downtrends
o Point 14: 2-period negative reversal
 Can draw another horizontal resistance line on price here
o Point 16: Forms bullish divergence with Point 15
 Continues pattern of negative reversals and bullish divergences, indicating a
downtrend
o Point 17: Longer-term negative reversals
 RSI peaks are getting lower on a longer-term basis
 Take support levels at Points 15 and 16 to set price objectives (not reached until
October)
o As long as you’re able to continue setting objectives (off of reversal patterns) then you stay
in the direction the market is moving
 Chart 2-46: 5-point checklist for identifying uptrends and downtrends
o Uptrend checklist
 80-40 RSI range
 Top Bottom Support – tops becoming bottoms, prior resistance lines being used as
support lines
  Bearish divergence
 Positive reversals
 Higher highs and higher lows
o Downtrend checklist
 60-20 RSI range
 Bottom Top Resistance – bottoms becoming tops, prior support lines being used as
resistance lines
 Bullish divergence
 Negative reversals
 Lower highs and lower lows
o Suggestion: Put this checklist on a 5x7 card and tape it to computer and your mirror
 Keeps you focused, keeps you in tune with the trend, keeps you on the right side of
the market
 Moving averages (Chart 2-48):
o Useful to smooth volatility in Price and RSI
 Can choose between simple, weighted, and exponential
o Long-term to intermediate-term (standard)
 Simple 9 and weighted 45
 Use on 14-period RSI
o Intermediate-term to short-term
 Simple 9 and exponential 20
o Short-term
 Simple 4 and exponential 20
 Keeps the 1 to 5 ratio of short to long that was used above (9*5=45)
o Very short-term
 Simple 4 and simple 9
o Short-term overbought/oversold
 Simple 3 on 3-period RSI
 Smooths out an overactive 3-period RSI
 Can then apply range rules to it
o Guidelines:
 MAs on RSI are more sensitive than MAs on Price
 MAs on RSI will cross before MAs on Price
 Therefore just because MAs on RSI indicate a downtrend doesn’t mean it’s a
downtrend until MAs on Price confirm (i.e. put more emphasis on Price MAs
than RSI MAs)
 Trend is Up:
 RSI: shorter-term MA above longer-term MA
 Price: shorter-term MA above longer-term MA
 Enhances a positive reversal signal
 Trend is Sideways to Up
 RSI: shorter-term MA below longer-term MA
 Price: shorter-term MA above longer-term MA
 Should be a good up signal but would be better if RSI agreed
  Trend is Sideways to Down
 RSI: shorter-term MA above longer-term MA
 Price: shorter-term MA below longer-term MA
 Should be a good down signal but would be better if RSI agreed
 Trend is Down
 RSI: shorter-term MA below longer-term MA
 Price: shorter-term MA below longer-term MA
 Enhances negative reversals
 Slope doesn’t matter as much as just whether the 9 is above or below the 45
 Use moving average confirmation in conjunction with signal count to determine
strength of reversal pattern
 Can also look to see where the 1-period RSI or Price is relative to their respective
SMA9s and WMA45s
 Chart 2-50 – Swiss franc Mar92-Sep92
o Point 1:
 Price MAs down (9 below 45)
 RSI MAs turn positive (9 above 45)
o Point 2:
 Price MAs moving sideways then cross down
 RSI support is held just below 40 level
 Look for divergences
o Point 3:
 MAs for Price and RSI had turned up end of April but pullback to support at WMA45
 Since supported by MAs look for positive reversal patterns
o Point 4:
 MAs for Price and RSI both indicate uptrend
o Point 5:
 MAs for Price and RSI both indicate uptrend
o Point 6:
 MAs for Price and RSI both indicate uptrend
o Point 7:
 RSI MAs cross down, Price MAs stay up indicating trend is sideways to up
 Chart 2-51 – Dollar Index Apr92-Oct92
o Point 1:
 RSI below 60
 RSI MAs down (9 below 45)
 Price MAs crossing down (9 below 45)
o Point 2:
 Price MAs cross up (9 above 45)
 RSI MAs crossed up but then both pointing down again
o Point 4:
 Negative reversal forms with Point 3 (more than 5-period but still appeared
indicating downtrend)
 RSI still below 60 indicating 60-20 range still in effect
  Price and RSI MAs still down
 Price tests its 45-day MA
o Point 6:
 Bullish divergence with Point 5 (usually come in downtrends)
 RSI MAs cross up
 Price MAs still down and stay down
o Point 7:
 RSI rallies but only to 50 level
 45-day MA was resistance on Price
o Point 8:
 RSI MAs cross down
 Price MAs have stayed down
o Point 9:
 Longer-term bullish divergence with Point 5
 Chart 2-52 – Bonds Mar92-Sep92
o RSI held 40 level in late-April
o wma45 was support for Price from late-May through early-June
 As a result the sma9 also stayed above the wma45
 During this time the RSI MAs were up and down
o Moving averages will help in identifying not only trend but also where a market is
overbought or oversold.
 Chart 2-53 – Bonds Nov91-Sep92
o Jan:
 RSI bounce off of 80
o Mar:
 Bullish divergence with Feb lows
o Apr:
 RSI rallies up to 60 level
 Falls back to support at 40
 Price and RSI MAs down
o May:
 RSI and Price MAs turn up
 top-bottom support (tops becoming bottoms in price)
 RSI broke through 60
 Chart 2-54 – Swiss franc Jan92-Sep92
o Apr:
 RSI finds support at 35
 MAs turn up
o May:
 RSI finds support around 45-day MA
 Price MAs cross up
 Chart 2-55 – Swiss franc Mar92-Sep92
o May:
 RSI finds support around 45-day MA
  Price MAs cross up
o Late-May:
 Bearish divergence at 65 level
 pulls back into 2-period positive reversal
o Jun:
 RSI finds support on sma9 showing you that people are aggressively buying the
pullbacks (more aggressive than finding support on the 45)
 Chart 2-56 – Dollar Index Sep91-Sep92
o Mar:
 2 bearish divergences
 Price MAs up
 RSIsma9 starting to flatten out and then cross down
o Early-May:
 negative reversal
 RSI MAs down
 Price MAs down
o Late-May:
 RSI rallies to 50 and creates another negative reversal
 that rally has Price finding resistance at declining wma45
 Price and RSI MAs still down
 Chart 2-58 – Soybeans Mar92-Sep92
o May:
 4-period bearish divergence
 draw trendline on RSI showing that bearish divergence not broken until August
 Price pulls back and finds support at wma45 before going to new highs
o Jun:
 6-period bearish divergence a little lower on the RSI than the divergence in May
 RSI and sma9 above 60 so think 80-40 range rules for RSI and its MAs
o Late-Jun:
 Price and RSI MAs down (saying the next move is probably going to be down)
 RSI rallies into resistance at declining 45
 Seeing longer-term loss in momentum
 Chart 2-60 – NDX Jan88-Sep92
o An sma3 on an RSI3 can be used for a short-term overbought/oversold filter
 Don’t buy when sma3rsi3 > 80 because it’s short-term overbought
 Don’t sell when sma3rsi3 < 20 because it’s short-term oversold
 Will have its own divergence and reversal patterns
 Seeing a positive reversal on the sma3rsi3 or seeing the sma3rsi3 way down
below 20 adds to the probability of up if you also see Price and RSI MAs up
 Just use as filter unless real short-term trader
 Chart 2-64
o Uptrends
 80-40 RSI range
 Bearish divergences
  Positive reversals
 Moving averages positive (Price s9>w45)
 Moving averages positive (RSI s9>w45)
 Spike bottoms (RSI and Price)
 You don’t see bullish divergences in uptrends that often, more often you see spike
lows in the RSI that turn out to be positive reversals
o Downtrends
 60-20 RSI range
 Bullish divergence
 Negative reversals
 Moving averages negative (Price s9<w45)
 Moving averages negative (RSI s9<w45)
 Spike tops (RSI and Price)
 In downtrends you see bullish divergence but instead of bearish divergences you
see spike tops that create negative reversals
o Trading vs. Making Money
 Know and understand why you are trading (excitement, income, supplemental
income, hedging another business, better return than bank)
 Golden Rule: Buy low and sell high
 Three Keys to Success
 Trading Program
 Patience to wait for the signals
 Discipline to stay within the parameters of your trading program and more
importantly controlling your emotions
o Don’t get too excited with good trades and don’t get to depressed
with bad trades
 Luck: when preparation meets opportunity
o Know what to do when certain patterns show up
 Don’t stay with losing trades if there isn’t a reason to

Session 4 Disc B (00:00) – Pattern Recognition

 Patterns
o Divergence Patterns
 Bullish
 Bearish
o Reversal Patterns
 Positive Reversals
 Negative Reversals
o Hidden Signals for Intermediate Trend Change (similar to divergence but depends on where
in the chart it appears, good signal for intermediate trend changes)
 Bullish Divergence
 Bearish Divergence
 o Overbought/Oversold
 Up Trends – Intermediate to Long Term Support
 A price level resistance at a RSI momentum high becomes a price level
support (overbought becomes oversold, what was a top becomes a bottom)
 Intermediate to Long Term Positive Reversals
 Could have a signal count of 2-3 weeks or even a couple months
 Intermediate to Long Term Top Bottom Positive Reversals
 When a top becomes a bottom and also shows a positive reversal, this is the
strongest signal
o Oversold/Overbought
 Down Trends – Intermediate to Long Term Resistance
 Intermediate to Long Term Negative Reversals
 Intermediate to Long Term Bottom Top Negative Reversals
 Market moves occur faster in your mind than in reality
o When you see patterns setting up on the chart don’t jump in too quickly
o If you see a PR rally and pull back into another PR on TBS then slow down:
 Go through your work, don’t just buy
 What is the trend?
 PR is saying the trend is up and we should see higher prices
 What are possible support and resistance lines?
 What are the highs and lows for the last 5 days?
 What can we set as a price objective?
 Are the moving averages confirming (naked vs. enhanced)?
 What are my time cycles?
 Where’s my sma3?
 Don’t just buy at any price, wait for a pullback so you aren’t frustrated with the
bouncing around before the stock starts to move
 Chart 3-3
o Point 1
 RSI below 40 with Price just below 100
o Point 2
 Market rallied
 RSI went from below 40 but hit the 60 level and backed off
 Prices also went to new highs
o Point 3
 RSI pullback from the 60 level
o Point 4
 RSI rallies, breaking through the 60 level, went almost up to 80 level
 Range is shifting, indicates uptrend
 Price is also rising (higher highs in Price and RSI)
o Point 5
 RSI comes back to test the 60 level as support
 Then rallies into 5 creating a Bearish Divergence with point 4 (Line B)
 Indicates uptrend but needs a detour first
  Calculate price cycle retracements (Fibonacci) to see where detour might
pullback to
 Draw trendline on RSI
o Point 6
 Positive Reversal with point 3
 Indicates uptrend
 Expect break of bearish divergence RSI trendline from points 4 and 5 to
confirm uptrend
 Draw trend lines on RSI and price connecting point 3 and 6 (Line A)
o Line D
 RSI breaks RSI Line B created by bearish divergence
 Confirms uptrend
 Creates price level for future support at point 4 (should become top-bottom
support)
 Normally start to see an acceleration in the uptrend when bearish
divergence broken (the market was a little overextended and needed to
correct, after the correction is over the market should continue the trend)
 RSI breaks through 60 level indicating uptrend
 Line D is created by another bearish divergence
 Turns into a positive reversal
o Point 7
 Pullback still stayed above Price Line A
 Pullback stayed above Price support (top-bottom support) at point 4
 Long-term perspective still up
o Point 8
 RSI Line D broken confirming uptrend
 Creates bearish divergence at 80 level (Line E)
 Market is a bit high and should correct
 Divergence at the 80 level say it’s overextended on an intermediate- to
longer-term basis, needs to correct but the trend is probably still up
o Point 9
 Creates positive reversal with point 7
 Can draw price level support at point 7 and 9 but can also draw a trendline
connecting point 7 and 9 on price
o If you just get a momentum peak and don’t establish a divergence the market will usually
give you a sharp quick selloff because it was too weak to even create a bearish divergence
 They selloff quickly but the selloff is over quickly as well
 Same for bullish divergence
o A bearish divergence tells you:
 The trend is up
 We should get a correction
 It should correct to level based on price cycles before continuing back up
 Chart 3-4
o 80-40 range rules
o Point 2
 RSI found support at 40
o Point 3
 Price at 104.24
o Point 3*
 Price sold off to 104.07
o Point 4
 Price rallied back to 104.30 to create bearish divergence with point 3
o Point 5
 Price sells off to 104.15 creating a positive reversal with point 3*
 Set objective at 104.15 – 104.07 + 104.30 = 105.06
 Powerful pattern because part of the positive reversal is within the bearish
divergence
 RSI finds support at the wma45 (on Chart 3-5) as well as the sma9>wma45
 Don’t be afraid to buy positive reversal even when the RSI is up at the 60 level
o Point 6
 Breaks bearish divergence created by points 3 and 4, confirming uptrend
 Achieves and surpasses PR objective
 Price support will be at points 3* and 5 (positive reversal support)
 Price support also at 50% retracement of move between points 5 and 6
 Price support at momentum peak before that created the divergence (point 3 at
104.24)
 104.24 becomes top-bottom support
 Expect pullback to somewhere between point 3 (104.24, a previous top should
become a bottom) and point 5 (104.15, a positive reversal should hold)
 Could go ahead and put in buy order at 104.20
o Point 7
 Retraced more than 50% but held the price support levels created by points 3, 3*,
and 5
 Created positive reversal with point 5
 Entry:
 If you want to be aggressive (definitely getting in but maybe not at the best
price) then buy at close or better (<=104.20)
o This is less aggressive if you’re seeing positive reversals, bearish
divergences, top-bottom supports, and MAs are up
 Should have support at 104.15 and 104.07 so could also put your buy order
at one of those levels and stops below them maybe around 104.00
 The day after point 7 you expect a good solid reversal but the market will
usually open unchanged and drop in the first part of the day
 However the recommended approach is to see what the low was for day at
point 7 and put your low below there
o Can also look at the lows for the last couple days and put an order
there
 o Can also use wma45 as support although not applicable in this
example
o Can also use point 1 at 103.06 as long-term support if you want to
risk putting your stop lower
o Point 8
 Bearish divergence with 2nd point 7
 Went from 104.20 (1st point 7) to 110.25 (point 8) so 50% pullback would be
to 107.23
 Take profits
 Could be aggressive and play the down move but remember that the trend is up (i.e.
bearish divergence, MAs positive, 80-40 range)
o Point 9
 Sells off to 107.28
o Point 10
 Rallies to just above the 60 level
 MAs had turned over, now pointing down
 Probably going to get a deeper correction down
 From 101.08 (point 2) to 110.25 (point 8) the 50% retracement would be 105.67
 Also look to point 6 (105.28) as support because it’s close to 105.67, it broke
through divergence line A, and was a new high
o Point 12
 Holds the 40 level
 Got down to 106.30 which was below the 107.23 support set from the 50%
retracement of point 7 to point 8, but above the 105.28 support of point 6, and
above the 105.67 support set from the 50% retracement of point 2 to point 8
 RSI MAs negative but everything else has indicated uptrend, remembering that we
had to get the retracements out of the way
 Price below points 11 and 9 but above points 3, 4, 5, 6, and 7
 RSI makes longer-term positive reversal with point 2
 Since we’ve seen bearish divergences, positive reversals (even though outside the
optimal 2-5 period range), holding the 40 level, and completed a 50% retracement
we might want to take a look at the RSI sma3 to see if that’s oversold
 Could still go lower but we haven’t seen a negative reversal although the
recent rally did stop at the 60 level and the MAs are negative but the long-
term is still up with an 8-week positive reversal (with point 2) with long-
term support at point 2 (101.08), also have support at points 5 and 7
(104.15 and 104.20) and 104.07 where the positive reversals formed
 Potential resistance points to look for;
 What would be your first bottom-top resistance?
o Point 11 at 107.28 (was also at point 9 but broke through it on the
way to point 12
 If you played this down from point 8 and made a lot of money you may be thinking
the trend has changed and is going down but all the rules/checklist still say up
  The long-term positive reversal between point 12 and 7 sets a price objective of
106.30-104.20+110.25 (point 8) = 112.35
 Your risk down is to 104.20 (2.10 down vs. 6.05 up) but still in 80-40 range,
haven’t seen any negative reversals. MAs down though but we still consider
the trend to be up.
 Can also set objective from positive reversal on points 12 and 2 (106.30-
101.08+110.25=114.75)
 Entry
 Could get in on close or better tomorrow
 Could wait for tomorrow to close to confirm positive reversal
 Could wait for it to take out possible resistance at 107.28
o Point 13
 Creates bearish divergence with point 8
 Draw trendline C with point 8
 When trendline line is broken the uptrend will accelerate
 Broke above the 60 level (couldn’t do at point 10)
 RSI MAs turn positive
 Higher highs relative to point 10
 Probably still in uptrend
o Point 14
 Retraces to 108.29 (50% retracement from points 12 to 13 was 108.71)
o Point 15
 Doesn’t break bearish divergence line C
o Point 16
 Bearish divergence with point 15
 Doesn’t break bearish divergence line C
o Point 17
 Sells off to 40 level
 Wanted to see bullish divergence
 Only time you want to see it is if the 40 level holds and you have seen
positive reversals followed by bullish divergences
 A bullish divergence after a positive reversal is a good indication of solid
support
o Point 18
 Not a bullish divergence but started up again anyway
o Point 19
 Doesn’t break bearish divergence line C
o Point 20
 Broke line C (long-term bearish divergence from point 8 and 13)
 Confirms uptrend
 Should see an acceleration to the upside
 RSI MAs cross going up
o Point 21
 Uses bearish divergence line C as support
 o Point 22
 Uses bearish divergence line C as support
 Almost positive reversal with point 21
 Follows an almost bullish divergence at points 17 and 18
 Points 2 and 12 are still long-term support
o When looking at longer-term positive and negative reversals as well as longer-term bullish
and bearish divergences we prefer to see them less than 13 days back because we’re using a
14-period RSI
o Most positive reversal you see when the market is making a bottom will have the RSI at 40-
45 level
o If we set a positive reversal objective and see it achieved and surpassed then the market is
exceptionally strong
o Whenever you see a positive reversal you want to buy at that day’s close or lower because
that day’s close should be a support level
 Look at previous support levels to potentially get a better price
 If it doesn’t get down there then that means support is holding
 Look at the high of the day the positive reversal was created (point 7) and
the highs of the previous couple days. You can put in an order above that
but be careful because your stop is still the close on the day of the positive
reversal.

Session 5 Disc A – Pattern Recognition (Cont.)

 Chart 3-4
o How do you know point 7 (104.20) is a positive reversal before the next day?
 Go through the checklist but we won’t know for sure until it turns up the next day
and you can set an objective
 We’ve seen bearish divergences (points 3 and 4)
 We’ve seen positive reversals (points 3* and 5)
 Market is holding support
o Point 2 held the 40 on RSI
o 104.15 (point 5) should be support
o 104.07 (point 3*) should be support
o 103.06 (point 1) should be support
o 101.08 (point 2) should be long-term support because it held the
80-40 range should still be intact
 Points 3, 4, 5, and 6 above 60 so probably in 80-40 range
 Moving averages on RSI positive
 Moving averages on close positive
 Couldn’t say no to any item on the uptrend checklist
o A trend is up until proven otherwise (bullish divergence, negative
reversal, bottom-top resistance holding)
 Lower close on RSI, higher close on price relative to point 5
 Price cycle retracements show support levels for the retracement from point 6
  From close at point 5 (104.15) to close at point 6 (105.28)
 Or, from the day’s low at point 5 to the day’s high at point 6
 As each support is broken it becomes resistance
 Point 6 was a new price high
 Point 6 negated bearish divergence line A
 Seeing higher highs and higher lows in price
o At point 6 you see:
 New momentum high (price may selloff but could also keep going higher)
 Divergence break
 RSI moving averages positive (price could go higher, could pull back)
 There are usually 5 to 10 good trading opportunities a year
o You don’t have to trade every market every day
o You don’t have to take every single signal
o When everything says up then you want to be long but look for a good entry
 Add on positive reversals
 Take profits on bearish divergences but leave at least 1 contract but pull your stops
up based on new support levels
 Add to existing position on next positive reversal
 If your position closes in profit then you have a good price entry. If your position closes in loss then
you might be on the wrong side.

Session 5 Disc B – Pattern Recognition (Cont.)

 If you’re trading off the daily, look at one time frame bigger (weekly) and one time frame smaller
(hourly)
o If they’re all oversold at the same level then the move should be more significant to the
upside. If the daily was down to the 40 level but the weekly had been up to 80 and was only
down to 60 then you say well there’s going to be a little bounce but we’re still within the
uptrend. But if the weekly, the daily are both down around 40 then you’re oversold on an
intermediate basis and a long-term basis.
 If you’re trading off the hourly, look at one time frame bigger (daily) and one time frame smaller (15
minute)
 Chart 3-6
o Point 1
 3-period bearish divergence with 93.44 and 93.69
 Follows previous bearish divergence but this one shows up lower
 Draw line A
 Just above 60 level
o Point 2
 Falls to 92.38
o Point 3
 Rallied to 93.64, failed to make new highs
 RSI MAs starting to turn down (starting to show more intermediate-type weakness,
could be potentially good divergence)
o Point 4
  Sell off again but rally back to 93.07
 RSI finds resistance at declining sma9
o Point 5
 Another sell off then a rally back to 92.69
 RSI finds resistance at declining sma9
o Point 6
 Sells off to 90.68
o Point 7
 RSI crossed above the wma45
 More than 5 period Negative reversal formed with Point 4 (92.84 vs. 93.07)
suggesting lower prices, confirms the bearish divergence at point 1 is real
 Before the next day you don’t know if this is a negative but you know it
could be
o You see the resistance above it at points 1 (93.69, 93.44), 3 (93.64),
and 4 (93.07)
o First get out of your longs
o If you want to get short you can put an order below the low of
today and let it trigger the next day if it sells off
o Or put in an order close or better (>92.84) with a stop at 93.07 (if it
goes above 93.07/point 4 then it’s not a negative reversal)
o Or to help pick a point find out what the price cycle retracements
would be from the point 1 to point 6 run, anticipating that one of
those retracement resistances should hold because the moving
averages had turned down
o Where is the sma3
o Time cycles: how long since a low or high
o There’s no hurry if you want to be conservative. You can let it sell
off a little bit OR you can let it rally back and selloff again to where
OR you can give it a couple days OR you can give it a week. Just
recognize that since you have seen a negative reversal the trend
may have changed.
 Price objective: Points 6-(4-7) = 90.68-(93.07-92.84) = 90.45
 RSI sma9 still below wma45
 RSI below the 60 level at this peak
o Point 8
 RSI sma9 couldn’t get above wma45
 Sells off, rallies (92.03), sells off, rallies (point 8 at 91.41)
o Point 9
 Sells off to 90.56
 Might be creating a double bottom in the RSI and the price with Point 6 because RSI
at about the same value and price at about the same value
 Double bottoms create support, this might hold but let the charts show me
o Point 10
 Double bottom held but Point 10 creates 2-period negative reversal with Point 8
  Even though it’s only a .08 difference, it’s still a 2 to 5 period negative
reversal
 Price objective: points 9-(8-10) = 90.56-(91.41-91.33) = 90.48
o Compare to price objective of 90.45 set at point 7
o Now there are two negatives pointing to the same target and both
are below the double bottom
o Price objectives should be achieved and surpassed to confirm trend
 Entry:
o Try and sell to open at 91.41 (point 8) since that should be
resistance because it was the first part of the negative reversal
o Or put a sell to open order in below 90.56 which would mean the
double bottom was broken
o Can also put a stop order above 92.03 since that was your last rally
point before the negative reversal
 Moving averages down
 RSI still below 50 level (first negative we saw at point 7 was at 66 level)
 Given all this double bottom should not hold and the support at point 6 and 9
should definitely be broken
o Point 11
 Takes out support levels at 90.68 (point 6) and 90.56 (point 9), they should now
become resistance levels
 Takes out the price objective of 90.45, confirms downtrend
 Makes a new price and momentum low
 Take partial profits (when the market is oversold it will rally) and do price cycle
retracements to see how far it could rally back
o Point 12
 Meeting resistance from the double bottom (point 6’s 90.68 and point 9’s 90.56)
 Moving averages still down
 RSI topping out at 50 level
 12-period negative reversal with point 10
 Price objective: points 11-(10-12)=88.47-(91.33-90.38)=87.52
 This is a lower objective than the previous negative reversal set
 Bottom-top negative (from double bottom)
o Point 13
 Creates intermediate-type bullish divergence with point 11 (further proof of
downtrend), Line E
 Surpassed price target of 87.52 (confirming downtrend)
o Point 14
 Rallies into another negative reversal along line F
 When you start seeing one negative reversal right after the other it’s just
more and more confirmation (points 4&7, 8&10, 10&12 are negatives,
support at points 6&9 becomes resistance at point 12, points 11&13 is
bullish divergence, point 14 negative reversal, moving averages down from
point 3
  Example of negative reversal happening at a 35 level
o Point 16
 Bullish divergence with point 15
 Evidence of down trend
o Point 17
 Have been making lower prices and higher RSI values but staying below the 50 level
 With moving averages turning up you could say we might have a short-term bottom
 Every time you see a bearish divergence be alert to the fact that it could be the final divergence but
you have to see a negative to confirm it
o If a negative happens quickly after a bearish divergence then anticipate a rather big move
because of the fact that it’s showing a lot of weakness very quickly
o If a negative takes longer to show up then your market may be sideways for a while
 Chart 3-8
o Point 2
 >5-period Bullish divergence with point 1
o Point 3
 Rallies but finds resistance at 60 level
o Point 4
 Pullback but finds support at 40 level
 Forms another >5-period bullish divergence with point 2
 Draw line A
o Point 5
 Broke through 60 level but just barely
o Point 7
 Positive reversal with point 6
 Means we should get a rally to new highs
o Point 8
 Rally to new highs
o Point 10
 Creates positive reversal with point 9
 Draw Line C
 Bearish divergence created just before and just after point 10 (Line D)
o Point 12
 Creates bearish divergence with point 11
 Approaching 80 level
o Point 14
 Bearish divergence created with point 13
o Point 16
 Bearish divergence created with point 15
o When you get bearish divergences up around the 80 level it should just be a short-term
momentum peak, but if you’re getting multiple divergences it says it should sell off so:
 Figure out your 50% retracements from the previous positive reversal (points 9&10)
 Figure out your 50% retracement from the low at point 4 to the high at point 16
o Point 17
  Support line A held
 Chart 3-9
o Point 2
 <5-period bullish divergence with point 1
o Points 3&4
 Bearish divergence with peaks on left (not with each other)
o Point 5
 Found support 40 level
 Rally up from point 5 took out previous peak of 5352 (point 4)
 Next resistance should be point 3 (5385)
o Point 6
 New highs in price and RSI
 Takes out resistance from points 3&4 but not the peaks to the left (5562&5475)
o Point 7
 Starting to see evidence of tops becoming bottoms
 Since this is weekly chart your daily should start showing some sort of top-
bottom support or range analysis or moving averages turning up
 Creates long-term price support that’s held for rest of chart
o Point 9
 Bearish divergence with point 8
 After point 9 it sells off into a 3-period positive reversal (58.25 vs. 58.38)
 With bearish divergence and positive reversal the trend should be up
o Point 10
 Bearish divergence with point 9
 Bearish divergence with point 8
o Point 11
 Creates longer-term positive reversal with all valleys back to point 7
 Still hasn’t broken price support from positive reversal after point 9
 Connecting with point 7 on price chart gives long-term support that’s held at point
19, gives an idea of what the intermediate- to longer-term trend should be

Session 6 Disc A – Pattern Recognition (Cont.), Price Targeting

 Chart 3-9 (continued)

o a weekly chart is more of an intermediate- to long-term perspective
 if the moving averages are positive, i.e. the 9, simple 9 is above the 45 on both close
and RSI it’s setting the trend for you
o Point 12
 Momentum high
o Point 14
 Creates positive reversal with point 13, confirms the trend is still up
o Point 15
 Creates bearish divergence with point 12
o Point 16
  Creates another bearish divergence with point 12 but takes out the price and RSI
high from point 15
o Point 18
 Creates positive reversal with point 14
 Can draw trend line connecting lows on bar chart at points 14&18
 Can draw trend line connecting closes on bar chart at points 14&18
 Tightens up previous trendline from points 5&11
o Point 19
 Lower lows in price and RSI from point 18
 Sill holding price support from point 12
 Still have support on price from points 13&14 (positive reversal)
o Point 20
 Creates hidden (not as high on the chart) bearish divergence with point 17
 Near the 60 level on RSI
 This divergence (Line G) is below the previous divergence (Line F)
 Chart 3-10 (RSI moving averages for Chart 3-9)
o Point 5
 The moving average had turned positive on the pullback to the 40 level
o Point 7
 RSI used rising sma9 as support
o Points 18&19
 Even though they formed positives reversals with point 14 the moving average had
crossed going down
 Chart 3-11 (Swiss Franc weekly)
o Point 12
 Creates positive reversal with point 10
o Point 15
 Creates positive reversal with point 13
 Pulls back to the 60 RSI level
o Point 17
 Momentum high
 Finds resistance at 80 RSI level
 Chart 3-12 (RSI moving averages for Chart 3-11)
o Point 19
 Created bearish divergence with point 17
o Point 20
 Created bearish divergence with point 17
o Point 23
 Created hidden bearish divergence with point 21
 Moving average had crossed down just after point 21
 RSI rallied back up but found resistance on declining wma45
 Chart 3-13 (zoom of Chart 3-12)
o Make sure you’re trading in the direction of the intermediate and major trends which will be
influenced by the Weekly
 Chart 3-14
o Point 2
 Momentum high
 Up near 80 level
o Point 3
 Market sells off
 Creates positive reversal with point 1
 Point 3 – Point 1 + Point 2 = 9287 – 9278 + 9333 = 9342
o Point 5
 Creates bullish divergence with point 3
 When a positive reversal (which should be support) becomes your X point (point 3)
for a bullish divergence and then followed by another positive reversal (points
7&11) then you should be in an intermediate move
o Point 8
 Takes out price resistance set at point 4
 Creates bearish divergence with point 2
o Point 10
 Creates long-term bearish divergence with point 2
 Achieves and surpasses price target from positive reversal at points 3&5
o Point 11
 Creates positive reversal with point 7
 Confirming the bullish divergence at points 3&5
 Point 11 – Point 7 (positive reversal) + Point 10 (highest point at that time) =
9330 – 9324 + 9348 = 9354
o Point 12
 Achieves and surpasses price target from positive reversal at points 7&11
 Creates longer-term bearish divergence with point 2
o Point 15
 Creates bearish divergence with point 12
 Creates longer-term bearish divergence with point 2
 Looks like a double top but bearish divergences usually occur in uptrends
o Point 16
 Gets into an oversold level at about the same price of the high at point 2 (what was
overbought has become oversold)
 Creates longer-term positive reversal with point 5
 Point 16 – Point 5 + Point 15 = 9337 – 9284 + 9375 = 9428
 Line D on price chart holds for the uptrend
o Point 21
 Rallies to 60 RSI level which should have been the first resistance because points 13
& 14 was your first bottom-top point
o Point 23
 Pulls back from point 21 at initial resistance and almost creates another positive
reversal with point 22
 Chart 3-15 (RSI moving averages for Chart 3-14)
 Chart 3-16 (zoom of Chart 3-15)
 Chart 3-17
o Point 6
 Creates bullish divergence with point 4
 Line A on RSI holds till June
 Chart 3-18 (zoom of Chart 3-17)
o Point 19
 Creates bullish divergence with point 19 (same price though)
o Point 23
 Creates bullish divergence with point 21
 Finds support at 40 RSI level
 Sma9 has crossed up through wma45
 Hidden signals show up at intermediate and major trend changes
 Chart 3-19
o Line A: Bullish Divergence
o Line B: Positive Reversal
 Moving averages went and stayed positive
 Little bit of bearish divergence near 60 RSI level just before it breaks
o Line C (upper and lower): Positive Reversal
 Moving averages crossed after and went up to 80 RSI level
 Chart 3-20
 Chart 3-21 (moving averages from Chart 3-20)
o Point 3
 Creates longer-term positive reversal with point 1 at the 40 RSI level
o Point 4
 4-period bullish divergence with point 3 at the 40 RSI level
 Positive reversal becomes X point in bullish divergence with point 3
o Point 6
 Finds support on sma9
o Point 10
 Moving averages have crossed up
o Point 11
 Sells off through the wma45 but the sma9 is still above the wma45
 Creates an intermediate-term positive reversal with point 8, confirms bullish
divergence
 Chart 3-22 (zoom of Chart 3-21)
o Intermediate positive reversal at 1&3
o Bullish divergence at 3&4
o Intermediate positive reversal at 8&11
 S&P is a good market but because of the high margin requirements your money is better spent
elsewhere
 Chart 3-25 (Hourly)
o Point 2
  Momentum high
o Point 5
 Creates hidden signal bearish divergence with point 4 (same price)
 Also same price as momentum high at point 2 (means a lot of resistance at
that price)
 When you make a momentum high (point 2) and don’t create a bearish
divergence you usually get a quick sell off
 Moving averages cross down after point 5
o Point 6
 Creates intermediate-type positive reversal with point 1
o Point 7
 Creates bullish divergence with point 6
o Point 9
 Creates positive reversal with point 7
o Point 10
 Pulled back to line created by positive reversal at points 7&9
o Point 11
 Moving averages cross up
 Finds resistance at 60 RSI level
 Breaks divergence line A
o Point 12
 New price high (takes out divergent price at points 4&5, takes out momentum price
high at point 2)
 Creates bearish divergence with point 2
o Point 13
 Creates bearish divergence with point 12
 Draw horizontal line on price chart, if price closes above this then divergence is
negated and the uptrend is confirmed
o Point 15
 Creates bearish divergence with point 14
 Draw horizontal line on price chart, if price closes above this then divergence is
negated and the uptrend is confirmed
 Followed by another bearish divergence at the point * (starting to compress)
 With a bearish divergence we expect it to sell off a bit so look for support levels
 Previous bottoms had held at 9220 all the way back to point 1
 Figure 50% retracement from point 9 to point 13 = 9308
o Point 16
 Pulls back to 50% retracement at 9308
 Dips just below 40 RSI level
 Creates positive reversal with point 10 but moving average is down, expect bounce
o Point 18
 Creates negative reversal with point 9326 point
o Point 21
 Chops around but finds support at 40 RSI level and also at 9308 price level
 o When you negate divergence you should see an acceleration to follow, which you do.
 Chart 3-26 (zoom of Chart 3-25)
 Chart 4-2
o Naked signals are reversals without moving average confirmation
o 9-period moving average (price and RSI) is good for support and resistance especially on a
short-term basis
o 45-period moving average (price and RSI) is good for support and resistance especially on a
longer-term basis
o If Price and RSI moving averages are positive then the trend is up
o If Price and RSI moving averages are negative then the trend is down
o If Price moving average is positive and RSI moving average is down then trend is sideways to
up
o For shorter-term signals you can use simple moving average 4 and exponential moving
average 20 (because half of the standard 9 and 45), can use as leading indicator for what the
9 and 45 will do
o Your trading will be better if you focus on trading 2 to 5-period enhanced signals
 You want to be aware of longer-term reversals because that sets the bigger trend
 Always look at moving averages to see if the reversal is enhanced or naked
 Chart 4-3
o Mar92
 Price and momentum low
o Apr92
 RSI hit resistance at 60 level and created bearish divergence
 Both moving averages were up at the time of the divergence
 Double bottom in price, slightly higher bottom in RSI (intermediate-type bullish
divergence)
 RSI finds support at 40 level
o May92
 Both moving averages cross up
 Wma45 crosses above 50 RSI level
 Price finds support on wma45
o Jun92
 Price finds support on wma45
 RSI finds support at 50 level and created a multiple positive reversals
 Momentum high in June creates bearish divergence with momentum high in May,
but then broke it confirming uptrend
 Chart 4-4
o May92
 Bearish divergence
 By drawing a trendline between price closes on the RSI lows in Apr and May you get
a support line that held wma45 on price until late-June at which time it became
resistance as the moving averages crossed down
o Jun92
  Bearish divergence
 Lower than May’s, both moving averages cross down after
 Looks like a positive reversal forming but moving averages are down so don’t jump
on it because it could be a failure
 Not a strong signal but could get a rally or bounce, which you do, but finds
resistance on declining wma45 on RSI
 Even though the price temporarily broke through the 45, the 9 stayed below
the 45 on price and RSI

Session 6 Disc B – Trend Analysis & Trend Change Checklist

 5-2 Checklist
o 5-point checklist for uptrends and downtrends
 Allows you to analyze a trend, identify a trend change, monitor a trend, price target,
and manage a trade
 If you can answer yes to all 5 then do your homework because something is getting
ready to start
 Uptrends
 80-40 RSI Range
 Top-Bottom Supports
 Bearish Divergences
 Positive Reversals
 Higher Highs and Higher Lows
 Downtrends
 60-20 RSI Range
 Bottom-Top Resistances
 Bullish Divergences
 Negative Reversals
 Lower Highs and Lower Lows
o Bull/Uptrend Range Analysis: 80-40
 If in an uptrend and RSI is between 75-80 look for:
 Momentum Highs (short-, intermediate-, and long-term)
o Prices are probably still working higher
 Divergence (intermediate- and long-term)
o Probably just a short-term overextension, the more important trend
changes and divergences tend to show up between 70-75 where
maybe your X point is at 75 and the divergence point is at 70
 Complex Divergences
 If in an uptrend and RSI is between 70-75 look for:
 Divergence
o You may see momentum highs where the RSI runs up to 74 and
then runs up to 72 creating a divergence and sells off and then
comes back up to 75 but it still stays above the 70 level. They’re just
 short-term momentum pushes in price to where the momentum is
still continuing to make higher highs with price
 Momentum Highs
 Swing Failures in RSI Momentum
o RSI rallies above 70, sells off, rallies but fails to make a divergence
(lower high in price close)
o Indicates a lot of weakness coming in
 RSI Moving Average Crossovers
o When the sma9 gets over 70 you’re approaching intermediate- to
long-term overbought conditions and it’s usually an indication that
the intermediate trend is very, very overextended
 If in an uptrend and RSI is between 60-70 look for:
 Divergence (Simple 2- to 5-period)
o you may see an X point, or a momentum high up around 68 and
then a divergent point for a simple 2- to 5-period signal be around
65
 Positive Reversals
o sometimes take place and develop at the 60 level which means the
market is extremely strong because any pullback whatsoever is
being well supported
 Top-Bottom Positive Reversals
o maybe we had a divergence that showed up where the momentum
high was above 70 and then created a divergence but when it sold
off into this area of 60 to 70 it found price support on what had
been previous tops
 RSI Moving Average Crossovers
o Look for the 9 to cross the 45 down prior to or just as a divergence
is created
 If in an uptrend and RSI is between 50-60 look for:
 Divergence
o Indicates possible trend change, could be followed by a negative
reversal also near the 60 level 8-10 days later
 Top-Bottom Support
 Top-Bottom Positive Reversals
 Positive Reversal Support (intermediate)
o In a strong uptrending market sometimes the RSI will only come
back to the 50 instead of the 40 (means longer-term uptrend with a
lot of momentum behind it)
 If in an uptrend and RSI is between 35-45 look for:
 Overbought Oversold
o A price that was overbought is now oversold
 Positive Reversals
 Top-Bottom Positive Reversals
  Positive Reversal Support (intermediate- to long-term)
 7 out of 10 times the 40 level will hold but could drop to 35 before an
overbought oversold or positive reversal occurs
o Bear/Downtrend Range Analysis: 60-20
 If in an downtrend and RSI is between 20-25 look for:
 Momentum Lows (short-, intermediate-, and long-term)
 Divergence (intermediate- and long-term)
o May also see short-term where it rallies from the 22 up to the 40,
back to the 25 and up to the 40, then down to the 30 level where
each bottom is a little bit higher than the bottom before while
building a base in price (rising-type bottom formation, each new low
in price is making a higher low in RSI, it’s a longer-term divergence)
o Rising-type bottom formation also occur in intermediate- and long-
term
 Complex Divergences
o Develops down around the 20 level where you get momentum lows
maybe a 3- to 5-period signal, a rally, another divergence, another
divergence and then a quick sharp rally and then a pullback into
another divergence, or you will get divergences where you might
get a 2- to 5-period signal and then a quick rally into a negative and
then back down and another divergent point and another rally into
a negative or you get a complex pattern like we had talked about
where you get both bullish divergence and negative reversals but
this is all taking place below the 30 level
 If in an downtrend and RSI is between 30-35 look for:
 Divergence
o Good range to start seeing long-term divergences
o Look for moving averages to flatten out or start turning up. If
crossed then you’re more likely to get a 2- to 5-period divergence.
 Momentum Lows
 Swing Failures in RSI Momentum
o where you see the momentum low with a price low, a rally for a day
or two, and then the next day the market sells off sharply below the
close where your X point was but it doesn’t close down there, every
time the price gets below the X point it rallies back above it so you
never really get a divergence on close
 RSI Moving Average Crossovers
o The 9 may start turning up around the 30 while the 45 is at 35.
Could be developing a divergence or maybe just a momentum low
that turns into a hidden signal.
 If in an downtrend and RSI is between 30-40 look for:
 Divergence (simple 2- to 5-period)
 Positive Reversals
 Bottom-Top Negative Reversals
  RSI Moving Average Crossovers
o Preceding what should be a positive reversal but could also then
pull back to the 45 as support before it turns higher
 If in an downtrend and RSI is between 40-50 look for:
 Divergence
 Bottom-Top Resistance
o At previous X point or previous Bottom-Top Resistance
o Watch if previous momentum lows in price are still capping any rally
because then it means your trend is still down
 Bottom-Top Negative Reversals
o Indicates market is extremely negative
 Negative Reversal Resistance (intermediate)
 If in an downtrend and RSI is between 55-65 look for:
 Oversold Overbought
o RSI gets near 55 but price is below where it was when RSI was
making momentum lows below 30
 Negative Reversals
 Bottom-Top Negative Reversals
 Negative Reversal Resistance (intermediate- to long-term)
 5-3: 10-point checklist
o Up Trends (will usually see 1-7 below in order)
 Top-Bottom Support
 What was resistance becomes support
 Bearish Divergence
 Starts with a momentum high
 Positive Reversal
 Higher Tops / Higher Bottoms
 80 / 40 Range of RSI
 Pullbacks usually find support at the 40 level
 Top-Bottom Positive Reversals
 Spike Lows (RSI)
 Whenever there’s a selloff in an uptrend it’s usually sharp and quick
 Close Moving Average Positive
 Used for trend analysis and confirmation when we see positive reversals
and bearish divergences
 RSI Moving Average Positive
 Used for trend analysis and confirmation when we see positive reversals
and bearish divergences
 Overbought / Oversold
 Longer-term evidence of uptrend, indicates major move
 Example: it finds support at the 35-40 level at price levels that were
previously overbought
o Down Trends (will usually see 1-7 below in order)
  Bottom-Top Resistance
 What was support is becoming resistance
 Bullish Divergence
 Negative Reversal
 Lower Tops / Lower Bottoms
 60 / 20 Range of RSI
 Bottom-Top Negative Reversals
 Spike Highs (RSI)
 Close Moving Averages Negative
 RSI Moving Averages Negative
 Oversold / Overbought
 The market may rally up to or just shy of a price that had been a momentum
low down at maybe the 30 or the 25 level but now it’s showing up at the 60
level and it’s also showing up as an intermediate-type negative and may
even rally up into a declining 45-period moving average
o Knowing the order that these come in will help to identify managed trades where you stay
positioned in the direction of that trend. For the uptrend start off by buying one or two
contracts, if you see a bearish divergence take a profit on one, let it pull back into a positive,
figure out where your price cycles are and when it pulls back into that positive add the
position back on that you took off initially but maybe buy another one and then when it
goes up sell out of those two, let it pull back, but all the while leave one on so that if you
miss a trading opportunity where it doesn’t pull back the next day like you think it will and it
takes off you at least have that one on in the direction of the major trend.
 Chart 5-4 (the ABCs of RSI)
o C creates bullish divergence with A
o G creates positive reversal with E
o K creates positive reversal with I
o T creates negative reversal with R
o X creates negative reversal with V
 5-5 – Charts Andrew used
o Price (open, high, low, close)
o Volume
o Open interest
o RSI14
o Sma9 of RSI14
o Wma45 of RSI14
o Sma9 of close
o Wma45 of close
o RSI3 (only on short-term periods)
o Sma3 of RSI3
o Momentum20

Session 7 Disc A – Related Studies

 6-1: Related Studies
o Andrew does not use Elliot Wave
o Andrew’s time cycles and price cycles come from a Gann book
o First 35 pages of How To Make Profits in Commodities discusses trend analysis and is worth
the purchase price
o Steve Nison’s book is the authority on candlesticks
 A lot of patterns in RSI relate to candlestick patterns
o Bob Prector is authority on Elliot Wave
o When different methodologies line up then it should be a significant move
 Chart 6-2 (weekly)
o 21-day moving average with +-4% bands
o 90-day moving average with +-6% bands
 Bands may be used as support and resistance lines
 Trading bands most helpful on weekly and daily charts
o If the range and close of the day is above the moving average then it’s positive, if it’s below
then negative
o May89
 Ranges and closes of price are outside top band as a bearish divergence is created,
but then price moving average acts as support
o Late89
 Divergence below 70 saying the market was starting to lose a lot of momentum
o August90
 Created divergence with April90
 At the X point price was below the ma21 lower band and just above the ma90 lower
band
 At the divergent point price was below both lower bands
o June91
 RSI finds support on 40 saying the market may now be in the 80-40 range
 Price dropped below ma90 but was finding support on ma21’s lower band
 RSI then moves up with 9 crossing 45 and price also moves above ma21 and ma90
o September91
 RSI reaches 70 and price hits upper bands of ma21 and ma90
 Chart 6-3 (November Bean – Daily)
o May92
 Bearish divergence occurs as price is above ma21’s upper band
o June92
 Second bearish divergence is lower than first, price hitting resistance on upper
bands of ma21 and ma90
 RSI moving averages turned and crossed down, price fell below ma21 and ma90
 RSI tried to rally back but hit resistance on wma45
o July92
 RSI breaks below 40 and price rides lower bands of ma21 down and breaks through
lower band of ma90
 o See where you are in relation to a longer-term perspective
 Chart 6-4
o February92
 Started to make a low in momentum in RSI
o March92
 RSI making higher bottoms as prices were making lower bottoms
o April92
 2-period bullish divergence while price on lower band of ma90 and ma21 starting to
flatten out
o May92
 RSI moving averages cross up
 RSI pulled back to support on wma45
 Price crosses above ma21 and ma90
 Bearish divergence in RSI which says uptrend
 Then top-bottoms and positive reversals
 Chart 6-5
o MACD is aa good trend following indicator
o MACD will show divergences just like RSI as in September90 with March90
o MACD holds the zero line more or less as RSI holds the 40
o Use MACD in conjunction with close moving averages and RSI moving averages
 Chart 6-6 (Swiss franc – Weekly)
o November90
 MACD crossed down at same time as bearish divergence
o May91
 RSI and Price hit low with moving averages on price and RSI crossed down
 MACD crossed as RSI crossed the sma9 and RSI crossed the sma9
o March92
 Made higher bottom in price and RSI as RSI found support on 40
 Chart 6-7 (Swiss franc September)
o May92
 MACD crossed above zero line when price moving averages were crossing up
 Chart 6-8 (dollar index)
o Decision is primarily based on RSI, 5-point checklist, and 10-point checklist but he will use
MACD and trading bands as additional input
 7G-2 (Glossary)
o Recommend taping checklist to monitor
o Recommend keeping copy of glossary close by for reference
 The more you study the more it will be become subconscious and develop gut feels
o If something doesn’t feel right then you’re probably forcing the issue. Get up and take a
break for a bit then come back to it.
 8AA-4 (Reprint of Wilder’s RSI)
 9AB-3 (Suggested Reading)
 10AC-2 (Recommended software, data, and charting from 1993)
 10AC-4 (Cardwell Financial Group Inc. Services)
 Main benefits of using RSI
o Never have to worry about being on the wrong side of the trend
o Most surprises will take place in the direction of the trend
 The two hardest things to learn to be successful in trading are patience and discipline.
o keep track of how you feel when you’re trading, are you tired, are you excited, are you
scared, and start to learn a little bit about yourself
o Mark Douglas’ book will help
 Approach this as a business, be patient to wait for the signals and have the discipline to stay within
yourself and within the parameters of the trading program