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Earlier in this bullish upward move I had tried to get some idea what high RSI readings in the major indices might mean for the index going forward. I used the 20 period RSI crossing some preset RSI reading and then exiting 22 bars later.

When the RSI level had crossed the 60 point back in mid August my data had suggested that the upward move could continue. On Thursday last week (10/5/2006) the RSI reading for the SP500 had crossed the 68 level and I wanted to see what this might project going forward. I ran the data on the SP500 going back until May 1962.

The results are quite interesting. If you were to buy the SP500 index the opening after the index had closed above the 68 reading on the RSI and exited the trade the open after 22 days had elapsed - the results are as follows:

98 Trades would have triggered

70 Winners (71.43%) - average profit 2.68%

28 Losers (28.57) - average loss 2.05%

Seems to be a bit of an edge there.

I also ran it on the Dow Jones Industrial's going back to May of 1915 . Results as follows:

220 Trades would have triggered.

142 Winners (64.55%) - average profit 3.36%

78 Losers (35.45%) - average loss 2.66%

Again we see similar results. Will it play out this time? I'd say we have about a 65% chance ;)

I also copied the trade data over to an excel spreadsheet for those that would like to check out the individual trades themselves. That sheet is located here.

This also this leads me to wonder what RSI value would be most optimum? I ran a quick optimization to see where the highest profit per trade would lie. I used the Dow data going back to 1915. Looks like RSI readings in the mid 60's to the mid 70's have had the highest average profit per trade.

Readings above the mid 70's are very rare and certainly would be quite bullish.



Have a Great Night!

Dave Johnson

http://dayvejohnson.blogspot.com

dayvejohnson@gmail.com

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