PART I

THE RSI DISTORTION

In this section, I will demonstrate that the best way to study RSI charts is to use slanted
reference lines rather than horizontal reference lines as we would in price charts. This
means that when prices rally in a staircase-like advance, the resulting RSI chart will be
in the formation of a series of \-slanted segments or channels. In a price decline, we
will find I-slanted channels in the RSI . Understanding this RSI logic is essential for
further analysis.

When analyzing RSI charts, one of the first problems encountered by the user is that
the RSI chart looks so much different than the price chart. Look at a bull market, for
instance. Prices on the chart rise steadily, while the RSI values on the chart meander
up and down in a nearly horizontal range, roughly between 40 and 80 in RSI bull
territory.

Figure 2.1

"

"

c
60

,
"
1 20
80,

115
,
"
1 10

1 00

Let's try to make the RSI chart resemble the bull market price action more closely. If
the RSI charts are printed on paper, then cut and pasted in a strip, this strip could be
overlaid in such a way that it mimics the price movement in a climbing range. This
results in something that looks like Figure 2. 1 , which is an RSI staircase going up in
steps similar to the underlying price moves while the RSI values are still confined to the
range between 40 and 80.

In a bear market, the RSI chart cascades down and oscillates roughly between the
values of20 and 60 in the RSI bear range. In Figure 2. 1 , the RSI strip has been tilted to
Walter 1. Baeyens

align with the price uptrend. The corresponding rising prices are symbolized by the
horizontal lines in the right comer of the chart and are labeled 1 00 to 1 20.

Points of equal price, (e.g. Price 1 20), in the RSI define a declining Line A-B, where
Point B is at a lower RSI level than Point A.

At Points C and D, the situation is more extreme: Point D is at an RSI level of 45 that
corresponds to a price level (that is not equal to, but higher than) Point C, which is at an
RSI level of 60. This immediately brings us to an important point. In bull markets, this
specific type of Price/RSI correlation appears where a higher price low is reflected in
the RSI by a lower low. This corresponds to the RSI buy signal introduced by Andrew
Cardwell. It is formed when the RSI rebounds off of a lower low, while the corresponding
price reverses up after a mild correction down.

When this appears in the RSI chart, it indicates that the market is a bull market in that
time frame. In a bear market, the horizontal line in the price chart connecting points of
equal price corresponds to a rising line in the RSI chart. Let me repeat that I see no
reason to call these "reversal" signals, as their occurrence in most instances only confirms
the strength of the trend in force.

A down-up sequence in price trend results in a down-up sequence of the RSI strips, as
depicted in Figure 2.2. In the bullish part of this chart, Line a-b connects points of equal
price; in the bearish part, Line x-y connects points of equal price.

Figure 2.2
RSI RAN G E-S H IFT : UP -+ DOWN

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 RSI: Logic, Signals & Time Frame Correlation

Figure 2.3

80

If an up-down trend change is represented in one horizontal RSI strip, as if presented

on a PC screen, the chart looks like Figure 2.3. This is what an RSI range-shift looks
like, possibly preceded by what could be a negative divergence, pushing the RSI below
the 40-1evel.

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Wa lter 1. Ba eyens

11(28 18:.5 11129 16:45 1100 18:45 1W1 18:45 12.04 18:45
iii

Figure 2.4 LRCX ( I S-minute)

This chart was used earlier to illustrate the "peculiar divergences" that exist between
price and the RSI. In this example, the RSI hits resistance at Point Y ' . If this drop in
the RSI is compared to the drop in price from Point X to Y, we can see the effect of
their logarithmic correlation.

The modest price rebound from Point Y to Z causes a spectacular j ump in the RSI from
Point Y ' to Z ' . This RSI distortion of price reality leads to the following conclusion: In
a bear market, points of equal price (Line W Z) will define a rising reference line
-

(Line W' Z ' ) in the RSI. So, if we study price changes in relation to their horizontal
-

references or price levels, we must then study the corresponding RSI changes in reference
to their slanted reference lines.

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