Constructing MACD, RSI, and stochastic confirmation for futures

One futures path, three constructions

Each futures market is described as having its own trading personality, so a combination of charting constructions is often needed to identify and confirm opportunities. MACD, RSI, and the stochastic oscillator can all be read from the same futures price path.

Editorial reading: treat the three constructions as different questions asked of that path. MACD is the early moving-average gap. RSI is single-contract velocity. The stochastic oscillator is a check on range-control extremes. Agreement can be treated as confirmation. Disagreement can be treated as a reason to withhold the hypothesis.

MACD as an early moving-average gap

MACD is constructed as the difference between two exponential moving averages, commonly the 26-day and 12-day averages, and is used to measure short-term momentum.

A common MACD application treats a cross of the signal line or zero as the directional cue. A drop below the signal line is treated as a sell. A climb above the signal line is treated as a buy.

A rising MACD is produced when the shorter average pulls away from the longer average. That rise is described as an overbought or oversold cue that the current directional move may fade. Divergence between MACD and price is also described as a possible trend-reversal signal.

RSI as single-contract velocity

RSI is constructed as a 0-to-100 reading of directional velocity inside a single futures contract. It does not compare relative strength across different futures markets.

Conventional RSI thresholds treat readings above 70 as overbought and readings below 30 as oversold. Another reading looks for a new price high that RSI fails to confirm by exceeding its own prior high.

The stochastic oscillator as range-control extremes

The stochastic oscillator is constructed on a 0-to-100 scale. Readings above 80 are commonly treated as overbought. Readings below 20 are commonly treated as oversold. The direction of the oscillator is expected to confirm the futures price.

Stochastic divergence is defined as oscillator values moving opposite the futures price, including a new price high without a new stochastic high. That split is described as a possible turning point or false breakout.

When the constructions agree or split

Editorial reading: when MACD, RSI, and the stochastic oscillator agree on direction, that agreement can be treated as confirmation of a directional hypothesis. When they disagree, or when divergence appears between an oscillator and the futures price, that split can be treated as a reason to withhold the hypothesis.