Here’s how you use RSI to forecast a pullback in Ollie’s Bargain Outlet Holdings (OLLI) (November 02, 2018)
OLLI
I want to look at RSI on Ollie’s Bargain Outlet ( NASDAQ: OLLI ) here and here’s why; well, a couple reasons. This is a stock, you can see up here, big, big move higher, relative strength index, Welles Wilder indicator, I am not going to go into detail on it here; this is a pure momentum indicator. People talk about it as being an overbought oversold indicator; it’s really not.
When you have got a stock that has really, really super high upside momentum, how do you know when it is overbought? It is being bought, it is not overbought, it is just being bought. At some point the buying is going to end but you don’t see that here. You see this thing peaking, the price is moving higher, but keep an eye on this level, we’ll use it right here, this line here for the high. You can see where this RSI is, I will go ahead and slap a line there as well. The stock goes through its gyrations here, moves up a little higher. The RSI, you will notice, even though the stock is up higher, the RSI is kind of peaked, we’ll say right about there.
So this is what I am going to do, move this up here. We have a peak in RSI, the price is right up here, same level, same level here, actually a little bit higher but look where RSI is. The last time when the stock hit this level here RSI was peaked above, almost at 95. It was well, this is a zero to 100 deal, you can’t go any higher than 100, so this was almost pegged to the ceiling, and then the stock moves even higher. But you look at where RSI is, it is down here quite a ways lower than this last high. So the stock is still moving kind of higher and the RSI is diverging.
So then we keep going and this stock tapers off and then it does what it does and it is exactly coming back here. But I am not talking about this part, I am talking about this part where the RSI had bedded at an extreme level and then started to taper off even as the stock made a higher high. This is an example of how an indicator like this can give you an early warning that the trend is in trouble. Now, it doesn’t mean that the trend is going to reverse; it might just kind of bend. It might just be trading sideways for a while; I always say you make your money on price you don’t make it on RSI, stochastics, Bollinger Bands, MACD, any of that stuff.
You make your money on price but you can use some of these other things as ways to have a better understanding of what the price is doing. It gives you kind of more information, I’ll say, it gives you color. So you look at the price as a primary indicator but if you can learn to use RSI, stochastics, things like that, as a way to augment, not substitute for or replace but as a way to augment your price analysis, you are going to wind up making more money; I promise you that.
Free Chart