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Oversold Stocks - Relative Strength Index - Market Timing Indicator
The number of oversold stocks is a market timing indicator. It is computed by calculating the number of stocks whose Relative Strength Index value (RSI) is lower than 30. The Relative Strength Index or RSI is a very popular technical analysis indicator developed by J. Welles Wilder and used by traders in different markets (stocks, futures, FOREX...). In technical analysis, RSI values below 30 indicate that the stock or security is oversold and that it may rise in the future.
This RSI breadth indicator calculates the number of stocks that are oversold; the higher the number of oversold stocks, the more likely the market will increase in the coming days. When the composite is applied to US stocks, you can for example use the S&P 500 to measure movements in the US stock market.
This composite can be applied to any market. The backtesting I have made show that the indicator could be interesting for very short time periods.
For example, in a market timing system, when the RSI breadth indicator is applied to the US stock market (All stocks including NYSE, AMEX, NASDAQ and OTCBB stocks); a trading system that buys the S&P 500 Index when the RSI composite stays above 600 for more than 2 bars and then exits after 5 bars has 62% success rate (62% of trades have positive gain) and returns on average 2% for every trade it takes. The signal however is very rare and should be combined with other profitable signals.
Additional filter: This market indicator reject stocks whose close price is lower than 2.
Other market indicators include the advance line or advancing stocks, advance decline volume, the number of stocks that are trading above their moving average.
To display the Relative Strength Index composite on a chart, click on the "Chart" button or add the following formula:
// Technical Analysis: RSI market timing indicator
RSI = getseries("_RSI INF 30", close, LastData);
Plot(a,"Stocks higher RSI 30",colorBlue,ChartLine,StyleSymbolNone);