2003issue C061-7
Reverse-engineered RSI as a next-close projection
For a k-period Relative Strength Index, one-day closing prices and the corresponding RSI values stand in one-to-one correspondence, so a hypothesized next RSI uniquely determines the next close. That inverted reading is the RevEngRSI.
- For a k-period RSI, one-day closing prices and the corresponding RSI values are in one-to-one correspondence, so a hypothesized next RSI uniquely determines the next close.
- If the hypothesized next RSI is above today's RSI, the implied next close is above today's close; if it is below, the implied next close is below today's close.
- After an RSI support, resistance, or projected future RSI is identified, a RevEngRSI series for that value states the next close at which RSI would attain it.
- The reverse-engineering construction applies to oscillators whose value depends on only one input and is intended only for the next-price projection.
A hypothesized next RSI names one close
For a k-period Relative Strength Index, one-day closing prices and the corresponding RSI values are in one-to-one correspondence, so a hypothesized next RSI uniquely determines the next close. If the hypothesized next RSI is above today's RSI, the implied next close is above today's close. If it is below, the implied next close is below today's close.
The reverse-engineering construction applies to oscillators whose value depends on only one input such as high, low, close, open, or volume, and is intended only for the next-price projection.
How the inverse is calculated
The k-period RSI is defined from up-close and down-close series. AUC is the average up-close, the (2k-1)-period exponential moving average of up-closes. ADC is the average down-close, the (2k-1)-period exponential moving average of down-closes. RSI(k)n equals 1 - 1/(1 + AUC(k)n/ADC(k)n).
Given today's close, RSI, AUC, and ADC and a chosen next RSI, X equals (k-1)*ADC0*(RSI1/(100-RSI1)) - AUC0. The next close is C0+X if X is greater than 0, or C0+X*((100-RSI1)/RSI1) if X is less than 0. That next close is the RevEngRSI reading.
A 14-period specification is the conventional lookback used when the inverse is applied on daily, weekly, monthly, or annual closes.
Support, resistance, and divergence as the next RSI
Support and resistance is a previously observed oscillator or price level treated as the hypothesized next RSI reading when converting that reading into a closing-price projection. Divergence is a price-versus-oscillator disagreement used to nominate the next RSI reading that the reverse-engineered formula then converts into a next-close target.
After an important RSI support, resistance, or projected future RSI is identified, a RevEngRSI series for that value tracks price and states the next close at which RSI would attain that value. Combining the inverse with divergences, horizontal support and resistance, and pivots makes the hypothesized reversal level visually explicit as a next-close RSI target.
When price is at an unprecedented high, classical price support-resistance cannot supply a target, whereas an overbought-oversold oscillator can still supply a hypothesized next RSI to invert.
A monthly Hang-Seng illustration
On a monthly Hang-Seng chart, an RSI resistance reading of 86.52 was inverted with a 14-period lookback to project a next-month close of 11635. The index later closed at 11888 with RSI at 86.91, and the inverse of 86.91 implied 11856.
All readings on this track · 32 readings
- 1989Volume confirmation windows and exponential average construction
- 1990Constructing stochastic %K and %D from range position
- 1990Build a weekly leading sector composite from scaled transports and financials
- 1990Constructing stochastic K and D lines and divergence cues
- 1993Relative strength index events depend on the chosen input combination
- 1995Constructing a dual-horizon force index
- 1996Building a range-normalized divergence index from relative strength index
- 1998Treat RSI as a testable filter rather than a trigger
- 1999Primary-cycle windows, then stochastic confirmation
- 1999Stochastic rules versus buy and hold
- 2001Constructing confirmation filters for RSI overbought and oversold extremes
- 2003Constructing divergence-equivalent relative strength index and stochastic oscillators
- 2003Reverse-engineered RSI as a next-close projection
- 2003Scoring open versus resolved relative strength divergences
- 2003Bull-and-bear-balance from OHLC bar patterns
- 2003Constructing bull and bear balance from session paths
- 2004Four-month rule: auto stocks as a market-regime warning
- 2004Constructing stochastic oscillator bands, crosses and divergence
- 2004Volume as an independent check on price oscillators
- 2004Simple dual confirmation for a short-horizon index-futures system
- 2005Confirm a stochastic divergence by reclaiming the first-swing bar
- 2005Weekly stochastic divergence and a long average on 2005 high-yield entrants
- 2005Predicted averages from related market baskets
- 2006Rank price-oscillator divergences, then filter by trend
- 2006Relative-spread-strength for cycle confirmation
- 2007Weekly breakout stretch and histogram divergence
- 2011A luxury-auction stock as a cross-market bubble warning
- 2014Running-percentile close divergences and trend filters
- 2015Rebuilding the relative strength index from close-to-average gaps
- 2016Constructing higher-high and lower-low stochastic pairs
- 2018Constructing composite relative-strength-index stochastics for reversal confirmation
- 2019Building a smoothed Stochastic oscillator of the Relative Strength Index for Price-indicator divergence checks