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Relative Strength Index: The Technical Indicator That Can Save You From Losing Trades And Help You Find Winners

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Using the Relative Strength Index (RSI) Last Week

In our previous week of trading, we didn’t have any trade exits. Instead, let’s discuss a vital technical indicator. One of the factors that made the materials stock in our Friday trade alert attractive was its notably low RSI, sitting at approximately 20.

RSI also saved us from a potentially unsuccessful trade last week. We avoided a bearish earnings trade on the online apparel company Stich Fix (NASDAQ: SFIX) due to its RSI of 29.

To recap the metrics we utilize when selecting earnings trades:

  • LikeFolio’s earnings score based on social data. Higher numbers indicate bullish sentiment, while lower (more negative) numbers indicate bearish sentiment. SFIX had an earnings score of -32 last week
  • Portfolio Armor’s gauge of options market sentiment. PA was neutral on SFIX last week.
  • Chartmill’s Setup rating, which measures technical consolidation on a scale of 1-10. For bullish trades, we prefer a high setup rating, and for bearish trades, a lower rating is ideal. SFIX had a setup rating of 3.
  • Zacks’ Earnings ESP (Expected Surprise Prediction), which compares the most accurate analyst’s estimate to the consensus estimate. SFIX had a Zacks ESP of 0% (neutral).
  • The Piotroski F-Score, a measure of financial strength on a scale from 0-9. Higher scores indicate better financial strength. SFIX had an F-Score of 4.
  • Recent insider transactions information. SFIX had open market sales this year and no open market buys.
  • RSI (Relative Strength Index), a technical measure of whether a stock is overbought or oversold. We look for RSI levels below 70 for bullish trades and above 30 for bearish trades. SFIX had an RSI of 29.

With 4 out of the first 6 indicators being bearish and 2 neutral for SFIX, we would have bet against the stock. However, the RSI indicating oversold conditions led us to pass on the trade.

As you can see in the chart below, SFIX initially spiked following mixed earnings reports last Tuesday. However, the gains were short-lived, and the stock ended the week essentially flat.

The RSI also presents opportunities for post-earnings trades.

During the summer, we successfully placed a bearish bet against the discount retailer Big Lots (NYSE: BIG).

Furthermore, we capitalized on its brief bounce after lackluster earnings last month by placing another bearish bet against the stock.

Moving forward, we will continue to take advantage of these types of post-earnings movements.

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