August 3rd, 2011 - Issue #595

In This Issue

1. RSI Indicator “Cornerstone” of Andrew Cardwell's Trading Model
2. Jim Wyckoff's Hot Market Report - August 3rd
3. Economic Calendar

1. RSI Indicator “Cornerstone” of Andrew Cardwell's Trading Model

The ideal technical indicator, according to Andrew Cardwell, Jr., is one that offers capability to identify and monitor the current trend, highlight overbought and oversold extremes, and give early warnings of a trend change

"The Relative Strength Index (RSI) is such an indicator, offering the best of all worlds," said Cardwell, president of Cardwell Financial Group, Inc., based in Woodstock, Ga. The RSI "is the cornerstone of my trading model," he said.

Cardwell is a featured speaker at this weekend’s 20th annual Telerate Seminars Technical Analysis Group (TAG 20) conference here.

"In the lectures and workshops I have given, I have shown how the RSI can be used as either a completely independent trading model or an addition to and enhancement of a trader’s current technical approach. I use it as a completely independent model to identify trend, support and resistance, overbought/oversold levels, divergence, trend change, reversal and price targeting."

Cardwell said most traders who use the RSI focus their attention on trying to identify bullish and bearish divergences. He said basic price and momentum divergence can and does help to identify extreme overbought or oversold conditions in market momentum.

"However, most traders fall prey to the concept of divergence and see it as the end or reversal of the prevailing trend of the market. All would be right in the world if markets were to reverse from simple divergence. But there are times when sentiment and momentum are so strong that the market continues to make new highs (or lows), which will keep the RSI at overbought (or oversold) levels for extended periods of time.

"Momentum and price corrections, when they do materialize, are usually sharp and swift. After these brief respites the market is then ready to resume its normal upward (downward) trend. With each successive new high (low) and divergence formed, anxious traders are ready to call for a top (bottom) and reversal of trend. However, in strongly trending markets, multiple divergences can and do develop, which only lead to corrections of the overbought (oversold) condition of the market.

"If a trader attempted to take positions based solely on divergences, he or she would need deep pockets and eventually exhaust his or her trading capital," said Cardwell.

While Cardwell takes note of divergence, he said that only shows the market is overextended and needs to correct the overbought or oversold condition. Even though the RSI is considered a momentum oscillator, he said it has more values as a trend-following indicator.

"One of the guidelines I have established for myself is to identify a range for uptrends as well as downtrends. As the market trends higher or lower I will adjust the normal range of RSI (70-30) to account for the shift in market momentum and bullish or bearish sentiment on the part of the traders. The fact that this adjustment needs to be made in the range of RSI is one of the first indications that the market is undergoing a trend change."

The ability of a trader to recognize a trend change quickly, reverse a position and trade in the direction of that next trend is the skill that traders must develop to be successful, said Cardwell. "By having a position in tune with the trend, the trader will have the opportunity to participate in the bigger market moves, which generate larger profits."

Cardwell has what he calls "Three Keys to Success: have a trading program, patience and discipline."

Jim has an excellent daily newsletter where he reviews different markets, alerts you for potential trades and much more. Included is his great bi-weekly newsletter with charts and a little longer term outlook. We recommend checking out his website, educational CDROM, and services at Jim Wyckoff

2. Jim Wyckoff's Hot Market Report - August 3rd

Potential Bullish Upside Breakout in Chi. Wheat

Click the image to enlarge

December soft red winter wheat futures on the Chicago Board of Trade on Tuesday scored solid gains and hit a fresh six-week high of $7.64 1/2 a bushel. Tuesday's price action also produced a bullish "outside day" up on the daily bar chart--whereby the high is higher and low is lower than the previous day's trading range, with a higher close. The bulls have quickly gained fresh upside near-term technical momentum.

Importantly, price action Tuesday also produced what could be the beginning of a bullish upside "breakout" from a three-week-old sideways trading range on the daily bar chart. For the bulls to get better confirmation of the upside breakout, there will have to be follow-through buying strength very soon. The wheat market bulls can also correctly argue that December soft red winter prices are now in a four-week-old uptrend on the daily bar chart.

The next upside price objective for the rejuvenated wheat market bulls is producing a close above major psychological resistance at $8.00 a bushel. Wheat market bears would gain some fresh downside near-term technical momentum by producing a close below strong chart support at this week's low of $7.07 3/4, basis December futures. Stay tuned!--Jim Wyckoff

3. Economic Calendar

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!