S&P 500 Index(SPX)

About the RSI and our Volume Indicators

The S&P 500 Index (^SPX) RSI (relative strength index) compares the magnitude of recent S&P 500 Index gains to the magnitude of recent S&P 500 Index losses and represents this information in a range between 0 and 100. Basically, it gives a reading of the strength of a recent S&P 500 Index trend:

• If the 14-day RSI is greater than 70, the security has trended up strongly over the past 14 days;
• If the 14-day RSI is between 50 and 70, the security has moved up over the past 14 days; however, the uptrend has not been very strong;
• If the 14-day RSI is between 30 and 50, the security has moved down over the past 14 days; however, the downtrend has not been very strong;
• If the 14-day RSI is below 30, the security has trended strongly lower over the past 14 days;
  The 1/9 PVO (Percentage Volume Oscillator) shows how recent daily volume production compares to the average volume generated over the past 9 trading days.
• A 1/9 PVO value greater than 1.15 indicates a volume surge that exceeds the average volume output over the past 9 trading days by 15%.

The S&P 500 Index 1/9 PVO (Percentage Volume Oscillator) shows how recent S&P 500 Index daily volume production compares to the S&P 500 Index average volume generated over the past 9 trading days.

• A 1/9 PVO value greater than 1.15 indicates a volume surge that exceeds the average volume output over the past 9 trading days by 15%.

How to use the RSI and our Volume Indicators

The market will not always reverse when the RSI exceeds 70 (or when it trades below 30), just as the market will not always turn when we see volume surges. However, the probability of a reversal is much higher when volume surges occur in conjunction with a strong market advance or decline.

The simple trading system below is based on the RSI and volume indicators; it can be used to trade the market successfully:

1. Sell on a significant volume surge when the RSI rises above 70. As a rule, Volume Surges (indicated by a high PVO) that appear during a strong index advance - (i.e., when the RSI > 70) - indicate potential downside reversals;
2. Buy on a significant volume surge when the RSI drops below 30. As a rule, Volume Surges (indicated by a high PVO) that appear during a strong index decline (i.e., when the RSI < 30) - indicate potential upside reversals;
3. Ignore Volume Surges that appear when the RSI remains between 30 and 70. Market reactions could be short-lived.