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The year started with a stock market swoon; the S&P 500 Index tumbled nearly 12% over the first three weeks of 2022. And it was nearly a vertical move. In fact, the S&P rose on just five trading sessions out of the first 21 days of January.
But since hitting a low on Jan. 24, it has been an equally strong reversal to the upside for stocks. The S&P has rebounded more than 8% since that low. And stocks have closed higher eight of the past nine trading days.
So, what’s next for this turbulent market?
In recent TradeSmith Daily articles, I’ve pointed out increased stock market volatility as a reason to be extra cautious. And this market turbulence is not likely to subside anytime soon.
The twin threats of rising inflation and slowing corporate profit growth is hanging over markets. This prompted the Federal Reserve to talk tough about raising interest rates more aggressively.
The good news is that earnings reports from S&P 500 companies have been terrific so far. Stocks haven’t been rewarded much for positive surprises, but the overall market is trending up again.
The bad news is, the next Fed policy meeting does not take place until mid-March. That leaves investors wondering about the timing and magnitude of potential rate hikes for at least another five weeks.
In the meantime, investors may have to get used to this and deal with more turbulent, yo-yo market swings.
But TradeSmith subscribers have a valuable edge they can use to help identify new trade opportunities, even in these turbulent markets.
Earlier this week, I explained how our exclusive Low Risk Runners strategy can help you find stocks that offer lower-risk entry points for potential trades.
And another of our exclusive strategies is tailor-made for the sharp stock market swings we are experiencing: RSI Rebound.
This strategy can help narrow your market timing to make better stock entry or exit decisions. And if you have Timing by TradeSmith, you can easily identify stocks that qualify as potential RSI Rebound trades.
RSI Rebound is based on the widely used Relative Strength Index (RSI) indicator that’s included in most online stock charting software. And it’s a key feature on our TradeSmith Finance platform.
The Relative Strength Index is a momentum indicator used in technical analysis. It’s designed to measure the magnitude of recent price changes to tell you if a stock is overbought or oversold.
You can apply RSI to any security or index, including stocks, ETFs, sectors, and even broad stock market indexes like the S&P 500.
A stock that’s overbought simply means the shares have already moved higher and may be overvalued. Overbought stocks may be primed for a trend reversal or corrective pullback in price. And this means the timing may not be right for entering a new trade.
Meanwhile, oversold stocks have already pulled back in price. And they may be undervalued and poised for a trend reversal to the upside again. This also tells you the timing may be right to enter a new trade.
RSI oscillates, or swings, between extreme highs and lows. A security is typically considered overbought when the RSI is above 70% and oversold when it is below 30%.
The standard is to use the past 14 days to calculate RSI. When RSI is at extreme highs (at or above 70%) or extreme lows (at or below 30%), it can be a strong additional signal that a turn in the opposite direction is likely.
RSI can be an especially powerful indicator of a possible trend change when it crosses down from above 70% (signaling a potential downtrend) or when it crosses up from below 30% (a possible uptrend signal).
Finally, RSI can spend a lot of time in between these extremes. And that reduces the reliability of the indicator. It can mean the price has not yet made its ultimate high or low, and the RSI may still reach an extreme high or low before the trend changes in the other direction.
Now that you have the basics of RSI, I’ll tell you how the indicator is used within our powerful RSI Rebound strategy to identify stocks that may be starting fresh uptrends.
First, we screen for securities that are currently in a valley area, according to our proprietary cycle-timing indicators. Each security must also have a Health Indicator status in the Green or Yellow zone.
Second, we narrow the list to include only securities with a 14-day RSI that has been less than or equal to 30% while in the valley area.
Third, to make the final cut, the RSI must rise above 50% but still be less than or equal to 60%. This indicates a strong possibility the security is changing its trend to the upside, but it has not already run up too far in price.
Yesterday, I used our screening tools to search for stocks that met our RSI Rebound strategy. Below is a screenshot of the steps I followed, which subscribers can replicate.
And here are the steps I followed in the screener:
- Select stocks in the Green or Yellow zones.
- For added conviction, I selected only stocks trending up.
- Select the strategy: Timing RSI Rebounds.
- I wanted only stocks that qualified within the last 30 days.
- Finally, I narrowed the search to stocks in the Russell 1000 Index.
Keep in mind that you don’t have to be this restrictive with your screening criteria.
You can include stocks in more indexes. You can even include all the stocks in our system, even if they aren’t included in an index.
Also, I could have included stocks that were in a sideways trend and used a longer time frame than 30 days. But I wanted to narrow my search to stocks in established, longer-term uptrends that may have recently had a temporary pullback in price.
That’s the great thing about our TradeSmith screening tools. You have plenty of choices when it comes to finding new potential buying opportunities.
And in turbulent markets like this, the powerful RSI Rebound strategy can help guide you to the right stocks at the right time. After all, timing is everything!