Wednesday, August 25, 2010

Understanding Relative strength Index and MA and VXX and other stocks

It is an index that show relative strength of the individual stock with the overall market index like the S&P. I found some very interesting observation in case of VXX. When ever the index was below 10, the market reversed and was allways a profit. So that is the only spot at which one can think of investing in VXX. Not looking at RS and not adjusting to time frame of the Moving agerage to 10 days can confuse about the buying and selling decisions.

Basically when the swings are faster, the time frame needs to be changed to a suitable range. Like 10 days is good for VXX. For individual stocks 30 day MA works very well.

I learnt this now. And will not make a mistake again on future index purchase and sell decisions. Both RS and MA are important, basing decisions on just one is not advisable.

I case of other stocks whose RS is moving higher and the stock is treading higher and it has an initial
high volume to begin with, that can be a good stock to purchase and hold. RS should always be moving higher above the base line.
And the opposite for shorting the stocks. It is interesting to see the decline in RS as a sign of shorting, ofcourse also below 30 day average. In case of BONT that slided from 16 dollars to 8 dollars the RS moved from 80 to 35.

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