At some point when price is above all time resistance a trader must determine when it is advantageous to take profit and exit in favor of a lower entry point. RSI is a good technical indicator that can often signal extreme price condition. But as can be seen from PSLV’s RSI history, many times RSI has signaled an over-bought condition and remained that way for a substantial amount of time. This has made exiting problematic. Investors have no worries, they are buying and holding. Another useful indicator is the slow stochastic cross of the 80 level. Together with RSI it gives a powerful signal. Another useful tool is the Elder Impulse System which measures momentum within the trend. Reversals of price action tend to happen on waning momentum. The Elder Impulse chart is designed to alert the trader to changes in momentum that may predict an upcoming price reversal.
The system utilizes the 13 day EMA (exponential moving average) and the MACD histogram (bars on the MACD study) to entry and exit points for long or short trades. Both measure momentum to a degree and when both are greater than the period that precedes them, a green bar is rendered on the chart. If one is greater and the other is less than the preceding period, a blue bar is rendered. If both are less than preceding period, a red bar is painted on the chart. Another way of looking at it is to measure the slope of the EMA and MACD histogram, both positive then green, split then blue, both negative then red. Green bars suggest a long trade entry. Red bars suggest a short trade entry. Blue bars suggest exit of any trade.
To determine whether long or short signals should be honored, a determination of the longer term trend is required. This is accomplished by multiplying the short term EMA by five, in this case 13, which gives us a 65 day EMA. Then we must determine the trend in the same manner by observing the slope. Positive is bullish and indicates a long trade is appropriate, all red bars should be ignored. Negative slope indicates a bearish trend and all green bars should be ignored. A complete description of the Elder Impulse System can be found here.
To sum it up: at any given time only two colored bars should be honored, while the third one is ignored. The slope of the 65 day EMA tells which to ignore, the red or the blue. In PSLV’s case, the slope of the 65 day EMA (blue) has never been negative. Therefore, all red bars are ignored and any short trade is unwarranted. Only the green bars suggesting long entry and blue bars suggesting long exit should be acted upon.
This system gives us another tool in the belt for when our other indicators are stretched beyond there historical ranges. I plan on utilizing this method to take some profits from the incredible run in PSLV. Since the 65 day EMA is positive and will remain so for some time, I will be looking for a blue bar on the chart that tells me momentum is waning to the upside. At that point I will sell to exit. If we see a red bar ultimately materialize, I will ignore the signal to sell to enter (short) and wait patiently for the next green bar.