Just for a change of pace I'd like to show you some new techniques for using the True Strength Index (TSI) indicator to generate timely BUY and SELL signals. These techniques involve 4 different patterns that the TSI may form before a powerful breakout occurs and prepare you to be on high alert in advance. I call these general patterns 'compression' patterns and as you will see, the TSI indeed can be compressed in such a manner with respect to the movement of price that the change in price trend direction becomes obvious very quickly once the TSI compression is released.
The names I have given to these compression patterns are: wedge, bullish, bearish and ZERO line.
Let's now look at an example of each, beginning with the wedge compression.
This daily chart of the U.S. Dollar Index (DXYO) is a classic example:
|Click on any chart to ENLARGE|
The bearish compression pattern of the TSI is one in which the TSI makes a series of lower highs and lower lows - a descending channel - while price appears to be generally rising.
Like each of the compression patterns, the bearish pattern takes time to develop. However, if one knows to look for this it can be seen some time before it detonates price (which offers a decisive trading advantage).
And finally, let's have a look at the ZERO line compression pattern. This one, somewhat like the wedge pattern, can be either bullish or bearish. But in this case one knows in advance which it is - because it depends whether the TSI is above ZERO and being repelled (eventually bearish) or below ZERO (bullish as in the chart below).
The key point to always try to keep in mind is that as long as the TSI is above ZERO, and especially when it is rising, price is always rising. And just the opposite for when the TSI is below ZERO (as in this chart of GDX).
Well, now you have some new tricks to use when making your next trading decision. Go get 'em!