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2. When the 9-period moving average based on price is below its respective 45-period moving average, and the 9-period moving average based on the RSI is below the 45-period on RSI, the trend is DOWN (at points f and prior to point a in Figure 16-15). |
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3. When the 9-period moving average based on price is above its respective 45-period moving average, and the 9-period moving average based on the RSI is below the 45-period on RSI, the trend is SIDEWAYS TO UP (at points a and c in Figure 16-5). |
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4. When the 9-period moving average based on price is below its respective 45-period moving average, and the 9-period moving average based on the RSI is above the 45-period on RSI, the trend is SIDEWAYS TO DOWN (at points c and e in Figure 16-5). |
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Since the RSI is a momentum-derived oscillator and since momentum often leads price, the 9-period moving average on the RSI will cross its respective 45-period moving average, before the 9-period on price will cross its respective 45-period moving average. I place more emphasis on the moving averages based on price. By staying aware of how the moving averages are behaving, you will remain focused on the overall trend. When I talk to another trader, I often say that the moving average on price is positive, the implication being that the short-term (9) moving average is above the long-term (45) moving average. The largest moves come when both moving averages head in the same direction, as can be seen in Figure 16-5 at points b to c and d to e. |
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One last thought on moving averages. The 45-period moving average will often prove to be support or resistance for the price, or the RSI. For example, a bullish market may retrace to its respective 45-period moving average (price and/or RSI), and then bounce off it, as can be seen in Figure 16-5. This is another sign of what the trend actually is, and in this case it indicates that the bulls are using the 45-period moving average as a support level to get long. |
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When I am determining what the trend is, I ask myself the following questions: |
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1. What is the RSI range? Has there been a range shift? |
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2. Is the market respecting the support and resistance areas of the dominant force, or is the market violating them and reversing their roles? |
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3. Have we broken an important trend line in the price or RSI chart? |
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4. What types of divergences are present? |
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5. What are the moving averages attempting to tell us? |
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