Analytical Toolbox: Cardwell Techniques with the RSI
July 10, 2008
The Relative Strength Index [RSI] is a momentum tool developed by J. Welles Wilder Jr. and is described in his 1978 book New Concepts in Technical Trading Systems. However, when considering broad application of this technical tool, traders really should also understand the techniques developed by Andrew Cardwell. Mr. Cardwell began working with RSI in 1978 and is considered a leading authority on the indicator. Although he uses RSI in futures trading, his approaches can be used across a variety of markets and time frames.
Unfortunately there are a variety of books by different authors and analysts on the market that discuss Cardwell’s work in an incomplete or incorrect manner. There are also others that call his techniques something else and claim them for their own. In the past, I’ve incorrectly attributed his work to another technician and it’s good to be able to set the record straight. An introduction to one of those techniques follows here.
But first … for more information about Andrew Cardwell, check out the two part interview conducted by Jeff Neal (Interview Central: Andrew Cardwell, Parts 1 & 2 on July 23rd and July 30th 2004, respectively). Please note that the website referenced in the article is no longer valid; however, Mr. Cardwell can be reached at cardwellRSI@hotmailcom .
RSI Ranges
When I first learned about RSI Ranges and checked them out on a chart, I realized the approach took technical analysis to another level. By working extensively with RSI and plotting it by hand, Cardwell became so familiar with it that he was able to identify different indicator characteristics for bullish versus bearish moves for a security. In particular, Mr. Cardwell identified the following RSI ranges:
- Between 40 and 80 for bullish moves
- Between 20 and 60 for bearish moves.
Although my previous understanding of these ranges included an approximate boundary area which was limited to the 14-period RSI, there’s more to these RSI Bullish Range and the RSI Bearish Range.
For now, Figure 1displays the weekly line chart for the S&P 500 Index Select SPDR (SPY) from its inception in 1993. The chart also includes the RSI indicator using boundary settings at 20 & 80, along with three horizontal lines: 40, 50 and 60. Bullish ranges are highlighted with green lines and bearish ranges are highlighted with red lines.
In addition to the standard indicator divergences, note how the indicator moves predominantly between 40 and 80 from 1993 through 1999 which is the bulk of the bullish market for US equities. It then begins to transition to a narrower band between the bearish high range of 60 and the bullish low range of 40 as the market undergoes momentum changes in 2000. At the end of this period, RSI breaks down below the bullish range level of 40, but continues to stay well under 60 as the 2000-2003bear progresses.
Figure 1: Weekly SPY Line Chart with RSI and Cardwell Ranges (1993-2008)
A move above the bearish boundary of 60 takes place in mid-2003 as the market is transitioning, followed by a strong RSI move near 80 in early 2004. From late 2004 until early this year RSI remained above the bullish boundary of 40, moving in a more narrow range while continuing steadily upward and extending above 60 with the strong move from late 2006 to mid-2007.
Ideally you could have readily made the same observations and comments I made. If you’ve never looked at the indicator using Cardwell’s approach it’s probably pretty eye opening.
Recent Conviction
Although many market participants were tracking the behavior of the Dow Jones Industrial Average as it approached the lows formed in March, Mr. Cardwell had already weighed in on the outcome by incorporating additional RSI techniques of his. It’s not to say that the he doesn’t monitor and respond to new information provided by the market, but more a matter of understanding the probabilities associated with the different tools he uses.
During a recent telephone conversation Mr. Cardwell referenced market action on May 19th that struck me. In the first part of the year I was less active in the markets and, as a result, much less in tune with them, but I remembered the market he was talking about. It turns out I posted a market view the following day and was leaning towards the bearish side without a ton of conviction. With that lack of conviction, I made some modest gains.
Figure 2 provides a daily chart for the Dow Jones Industrials—Cash. The market action on the 19th is highlighted with a vertical line that corresponds to 60.00 on RSI. Subsequent RSI behavior and strong signals before the June 26th breakdown below the March lows allowed Mr. Cardwell and his clients to profit much more significantly.
Figure 2: Daily DJ-Cash Bar Chart with RSI and Cardwell Ranges
Conviction and flexibility go a long way in helping traders stick with winning positions and manage risk.
References: The Relative Strength Index Explained, Andrew Cardwell. 1998 Telerate Seminar Series
To access other articles written by Clare White, please click here.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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