Definitions of Relative Strength Index, Bullish Consensus, Overbought, Oversold: From Bill of Maysville, KY: AM April 17, 2020
Roger Wright, I have learned a lot from reading your explanations of markets on here. Would you please define undersold, oversold, overbought, and underbought markets and how they relate to marketing decision? It would appear to me that most markets are grossly oversold at the moment.
Relative Strength Index aka RSI
Bullish Consensus is a subjective (opinion) evaluation of the likelihood of a commodity price action in the coming days and weeks.
Relative Strength Index (RSI) is an objective (mathematical analysis) evaluation of a commodity price action in the short, medium, and long term.
RSI is a momentum indicator which tracks the strength of recent price changes to measure overbought or oversold conditions in the price of bid and ask markets (futures and stocks).
RSI is a calculation which takes the price change for each up-day and each down-day of the most recent X number of days measured on a scale from 0 to 100.
Supposedly, the 14-day RSI is the most used. However, I prefer the nine-day RSI for commodity futures and the 14 and 20-day RSI for stock prices. The nine-day RSI is more sensitive than the longer days RSI’s. Some folks use a three-day RSI for day trading, but I have found it to be worthless, for the most part.
An RSI of 50 is perfectly neutral, meaning the price is just as likely to go up as it is likely to go down.
An RSI index of 30 is an oversold (aka due for an up day) market. A nine-day index of 20 is rare, but almost a sure bet (nothing is 100%) price will be up the next day. I saw a nine-day RSI on copper reach a 9 a very long time ago. It was truly a historic event.
Likewise, a RSI of 70 is overbought and is overdue for a down-day or two or three. A nine-day RSI of 80 is very rare and needs to be sold for a quick and easy profit in the futures market.
Never use RSI as your primary reason to sell or not sell your crops. However, if you have already decided to sell your crop this week, then RSI is a good tool to pick which day to sell your crop.
To summarize, the fewer the number of days included in the RSI formula, the more related to the short-turn price outlook. A three-day RSI would be a tool for day traders (in and out of the futures market during one trading day session) or for farmers trying to decide whether to sell cash grain today, tomorrow, or the day after tomorrow. RSI numbers using 50 or more days is not going to help one make a marketing decision for this week or maybe even this month, but certainly have value for longer term pricing potential.
As of this morning, the RSI numbers for May corn are:
9-day RSI is 29.35
14-day RSI is 29.60
20-day RSI is 31
50-day RSI is 36
100-day RSI is 40
Barchart does a great job of graphs and dozens of technical indicators. Go to the link below for the December 2020 corn chart. Look at the far-left column for the “Technicals,” and then click on “Technical Analysis” to access the up-to-minute RSI, Stochastics, and Moving Averages.
The nine- and 14-day Relative Strength Indexes are used to predict the price direction in the short run simply by indicating what has happened in the recent past. Any time those two RSI numbers are 30 or less, it is probably time to be buying corn and most certainly not be selling cash or futures corn in the next few weeks. On the other hand, if the 14-day RSI is 72 and you need money from your corn in the bin within a month or so, you better seriously consider selling corn now.
The 50- and 100-day RSI numbers are reliable indicators of where prices have been months ago compared to where they are now. Therefore, a person can reasonably expect the price to return to the prices seen 50 to 100 days ago. When these long-term RSI numbers are 40 or less, the market is oversold and when 60 or less, the market is overbought.
The nine-day and 14-day RSI are short term indicators only and have very little to contribute to the long-term price projection.
The 50 and 100-day RSI numbers are long-term indicators and have very little to contribute to the short-term price outlook.
With the old crop (May) corn 50-day RSI at 36, that indicates there is a long- term uptrend coming. Take a look at the November 2020 soybean 50- and 100-day RSI. Do those indexes indicate you should be pricing new crop beans or wait?
On April 17, 2020 May corn settled up 2½; April 20, down 8; April 21, down 5 and contract low, matching a 14-year low for the nearby corn futures month with a low trade at $3.01; then to a six year highs for corn, beans and wheat by early winter.