It’s time for the weekly analysis piece, giving you a little more insight into charts, indicators and how to use them effectively.

You can find our last piece here.

Last week we looked at MACD and Fibonacci retracements, this week we’ll look at Relative Strength Index (RSI) and On-Balance Volume.

Relative Strength Index (RSI)

The RSI is similar to MACD in that it is a momentum indicator, however, it offers a little bit of additional information.

RSI was developed by Welles Wilder a noted technical analyst, and it compares the magnitude of recent losses and gains over a specific time to measure the speed and the change of the price movements.

Generally, the RSI is used to tell if a currency is overbought, meaning the currency might soon correct, or oversold, meaning it’s due for a bounce. The median range is between 30 and 70. When the indicator is above 70, the currency is considered overbought, and below 30 it is considered oversold.

(click to enlarge)

It is possible for the price to remain at 70 or higher during an uptrend, and equally possible for it to remain on or below 30 for sustained periods of time, so buying at 30 or selling at 70 might not always be the best strategy. Another option is to buy near the 30 mark and then short your position nearer to the 70 point.

Another strategy is, during an uptrend, a buy signal occurs when the RSI moves down to 50, and then back above it. This means that a pullback has occurred, and buying should happen once the pullback appears to have ended and the upwards trend resumes. We use the 50 because, during an uptrend, it is very rare that the RSI reaches 30 and then increases past 50 and closes in on 70. Generally, if the RSI moves towards 30 during an uptrend, it is a signal that a potential reversal is about to happen.

It’s important to remember that a sudden and large price movement (up or down) can create false readings on the RSI.

Often, traders push the RSI targets to 80 and 20 respectively to avoid false signals. It is always best to use the RSI in conjunction with another indicator such as the MACD as well as with trend lines.

On-Balance Volume (OBV)

While volume is a valuable indicator, OBV takes much of the information and combines it into a one-line indicator. This indicator measures the aggregated buying and selling pressure by adding the volume on up days and subtracting it on down days.

The below is a BTCUSD chart where the OBV has maintained its general trend line, and the price would continue to trend higher after a few pullbacks.

(click to enlarge)

Some general rules with regards to reading the OBV are:

If the OBV is rising, and the price isn’t it is likely to follow the OBV and start rising as well.

If the OBV is rising and the OBV is flat-lining or falling, the price may be near its top for now.

If the price is falling and the OBV is flat-lining or rising, the price could be near its bottom for now.

 (click to enlarge)

Summary

If we look at a snapshot of all 3 indicators on today’s BTCUSD chart:

(click to expand)

What do we observe in this chart?

  • The price is in a general uptrend.
  • The OBV is flatlining.
  • The RSI is showing that BTC is currently overbought.
  • The EMA is agreeing with the general uptrend but has also started to flatten at its tip.

How might we interpret this data?

  • The OBV is indicating that the price might have reached its top.
  • The EMA agrees with the OBV with the move to flatten (or possibly turn further downwards) at its tip.
  • The RSI further confirms that BTC is being overbought as it is over 70, and in fact has started a pullback, which means the price is likely to drop.

As I have stressed before, it’s always important to look at multiple indicators to confirm a movement, and the above analysis is only partial, so should not be considered to be a full analysis or trading advice.

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