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  • Know about Powerful Oscillator: Relative Strength Index

    Publish Date: 30th July, 2018

    By: Shrikant Chouhan

    Before we get on the Nifty outlook, let’s look at why technical analysis can be handy while trad-ing at the exchanges.

    Importance of technical analysis

    Technical analysis helps us decide when to buy and when to sell. Such tools help us make pru-dent decisions. Technical analysis is study of price, which helps us determine buying, selling and exit points while trading.

    We should, therefore, look at oscillators that have high level of profitability. It is important in our markets because it is relatively volatile than other overseas markets.

    In that context, we feel that Relative Strength Index (RSI) is the most profitable tool while trading. RSI is basically an oscillator.


    An oscillator is a technical analysis tool. A technical analyst bands an oscillator between two ex-treme values and then builds a trend indicator with the results. The analyst then uses the trend indicator to discover short-term overbought or oversold conditions.

    Relative Strength Index (RSI)

    RSI is a technical indicator used in the technical analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market-based on closing pric-es of a recent trading period.

    The indicator should not be confused with its relative strength, which compares with other stocks, market indices, sector indices etc.

    The preferred time period is 14 days.

    RSI moves between 0 and 100.

    How to compute RSI

    Focusing merely on stock trends is not a handy strategy.

    RSI focuses on average gains and average losses for a specified period. This is how RSI is cal-culated:

    RSI: 100 - [100/ (1+RS)]

    RS = Average Ups / Average downs

    Average ups: Total gains in last 14 days / 14

    Average downs: Total losses in last 14 days / 14


    If RSI is above 70, it means the market is into overbought territory.

    In the above chart, Bajaj Finserv went up to Rs 5,500 after it breached RSI 70. Before crossing it, it was Rs 4,400, meaning that the stock grew by 20% (Rs 1,100) after it went into the over-bought territory (70 mark). It means that whenever a stock is in overbought territory, the grip of bulls become even stronger.

    Nifty also finds itself in a similar position.

    Do note that overbought doesn’t mean you have to sell, unless the stock is exiting the over-bought territory. Overbought territory is an opportunity to add stocks.


    In the chart above, Punjab National Bank was trading at Rs 140 before it fell below RSI 30. Now, it is trading somewhere around the Rs 90-mark. Therefore, going below RSI 30 indicates that there’s something wrong with the stock. This is when you should take short-selling breaks. Let it form a new pattern before you get into it.

    Case of strong stocks

    This is what our overall observation is. Strong stocks like Britannia and Bajaj Finserv don’t fall below the 30-35 mark. Therefore, these stocks are good for long-term investment.

    On the other hand, weak stocks rarely cross the level of 65-70. Axis Bank is an example of a weak stock.

    Divergence: Can the market shift its trend?

    RSI gives clarity about the larger trend. It helps us know whether the trend is shifting.

    Positive divergence: When RSI (the bottom split of the graph) is forming higher bottom and price (upper split) is forming lower lows, it signals a bullish trend

    The third important factor is the trend line. Once the stock breaks the trend line, the prices go up sharply. Therefore, breaking the trend line suggests the stock prices will go up.

    Negative divergence: If the prices (in the chart below) has hit a higher high and RSI has formed a lower low, it suggests a negative diversion. Thirdly, if the market cuts the trend line, it indicates the market will slide.

    Nifty: Symmetrical triangle

    Nifty has broken its symmetrical triangle, signifying formation of a new trend.

    The above chart suggests that Nifty will reach the 11,820 mark in three to four months.

    In the worst case scenario (in case of further rupee depreciation), we feel the Nifty will go up to 10,900.

    Cement, infrastructure, pharmaceutical and PSU Banks will be in focus. Foreign institutional in-vestors (FIIs) are also turning into buyers.

    As for the rupee, we believe there is limited scope for it to depreciate further. One of the reasons for this is the strong inflow of mutual funds. If the positive flows continue, the currency can ap-preciate in 18 months’ time.

    Q&A session

    1)   Ideal time period for RSI?: We prefer the 14-day time period. But it all depends on what is comfortable for you and what kind of a trader you are. If you are an intraday trade, the hour-ly time period would be ideal.

    2)   IndusInd Bank outlook: All private banks are in correction mode at the moment because pub-lic sector banks are clawing back lost ground. IndusInd will be in the Rs 1,850-2,000 band but we feel it may go up to Rs 2,200 in a few weeks’ time.

    3)  Reliance Industries: Depends on the time horizon. If it is short-term, avoid the stock. But if you have a medium- to long-term view, we feel the stock will bounce back from correction. Volumes pattern suggest stock may go up over the long-term.

    4)   Where to trade? NSE or BSE?: NSE is better for short-term trading due to higher liquidity.

    5)   GAIL prospects: They are strong right now. We expect them to move to Rs 430 (it is current-ly Rs 364), but it will take time.

    6)  Indraprashtha Gas Limited: The prospects look strong.

    7)  Ashok Leyland: Wait till the management commentary happens. It is better to avoid till then.

    8)  State Bank of India: Like all PSU banks, they have recovered sharply after the lowest lows. The recovery is much faster than expected. It may go up to Rs 340 levels. Bank of Baroda is another good option.

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    Disclaimer: Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Full disclaimer here

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