Wouldn’t it be great to have an indicator to help you know when we’re in a major bull or bear market? Imagine if you had a clear signal to exit the market on January 18, 2008 before the big market crash. Then the same indicator told you when to come back to the markets on August 18, 2009. That indicator would have also put you out of the market during the dot-com crash on October 27, 2000. Well, this indicator I’m going to talk about precisely it’s.
Below you will also find the EasyLanguage code for this indicator. This important trend indicator was inspired by an article titled “Combining RSI with RSI” by Peter Konner and appears in the January 2011 issue of Technical Analysis of Stocks and Commodities.
How does it work
Let’s start with a well-known indicator: the Relative Strength Indicator (RSI). The premise that we are analyzing is how to identify the main phases of the bull market and the bear market. In his article, Peter does this simply by using an RSI indicator on a weekly chart. Peter noticed that during bull markets, the RSI rarely drops below 40. Likewise, during a bear market, the RSI rarely rises above 60. Therefore, you can determine the beginning and end of bull and bear markets when the RSI crosses these critical levels. . For example, during the bearish financial crisis of 2008, the weekly RSI did not break above 60 until August 2009. This marked the beginning of a new uptrend. The next downtrend will be signaled when the weekly RSI falls below 40. With these simple rules, you can pinpoint bull and bear markets with the amazing accuracy afforded by the S&P futures market.
RSI Modification
I personally found the RSI signal a bit choppy. I decided to make two modifications to help smooth out the raw RSI signal. First, the entry on the RSI indicator changed from the closing price to the average of high, low and close. I then take this RSI signal and run it through a 3-period exponential moving average function. The results look like this:
RSI_Mod = RSI( (c+h+l)/3, RSI_Period);
Signal = Xaverage(RSI_Mod, 3);
Below this post, the paint bar indicator and strategy are available for download. Both are very simple and use the standard RSI indicator. The RSI uses a length of 16 and is applied on the weekly chart. I also smooth the RSI value using an exponential moving average of the last three readings.
Check-in and check-out dates
With this indicator, we present the following turning points for the main bull and bear markets of the US indices.
The dotcom bubble burst happened in 2000 and we exited on October 27, 2000. Then the indicator tells us to go long on June 13, 2003. Then we ride this until the financial crisis to get out of it. market on January 18, 2008. Then on August 18, 2009, we go long.
How can this indicator help you?
Looking at these dates, we see that they are quite accurate in capturing the major bull and bear cycles of the US stock indices. How can you use this in your trading? Well, maybe you can use this as the basis for a long-term swing strategy. Perhaps this is an indicator that lets you know when to liquidate your long positions in your 401(k) and other retirement accounts. Or perhaps if you are a discretionary trader you can use this to focus on trading in the main direction of the market. Anyway, I thought it was an interesting and novel way to look at the RSI indicator. I hope you find it useful in your trade.
Discharge
The source code for this indicator is available on my website as a free download. See the link below.