The Relative Strength Index (RSI) indicator was developed in 1978 by J. Welles Wilder. the RSI is a Momentum indicator that measures the change of the price movement. In this educational article, we will review how to apply the RSI with the Elliott Wave Analysis.
The basics
RSI and the Elliott Wave Principle
Johnson & Johnson (NYSE:JNJ), on its weekly chart, illustrates the RSI and the Awesome Oscillator. Both indicators show the divergence created between the end of waves three and five.
On the JNJ chart, we also can observe the RSI levels when price action runs in a wave three. When this occurs, the RSI tends to move between the levels 70 and 80.
In a bull market scenario, usually, the price action tends to find support near to level 40. When the price moves in a bear market, the ascending correction tends to find resistance near to level 60. This concept, with the swings identification, can support the wave analysis.
The following chart corresponds to the Dollar Index (DXY) in its 8-hour timeframe. From the figure, we observe the bullish sequence developed in five internal legs, in which we observe that each leg has three waves.
As a conclusion from the study using the RSI indicator and wave analysis, the price action unveils an ending diagonal pattern. The Elliott wave structure shows us that the Greenback should see new lower lows.
