Bearish RSI BAMM

     The Bearish RSI BAMM begins with a complex reading above 70.  Referring to the RSI BAMM illustration below, the entire process requires several elements to validate this specific scenario.   Although the entire illustration might seem a bit overwhelming upon first examination, this represents the ideal RSI BAMM model.   I recommend that you thoroughly study this material before employing these strategies in your live trading.    

  Each step will be broken down to illustrate the ideal RSI BAMM model.  Obviously, the ideal situation does not occur every time.  It is important to remember that the real application of the RSI BAMM principles will require a degree of flexibility. The ideal model does present all of the critical elements that explain clearly the effectiveness of this strategy.  It will take a period of study to fully comprehend all aspects of the RSI BAMM approach.   In much the same manner that the initial rules of harmonic pattern identification and differentiation may have seemed overwhelming, the RSI BAMM rules – albeit a bit complex upon first study – provide a coherent and comprehensive method for accurately measuring potential areas of divergence.   It is essential to maintain the patience to execute only those trades that possess all required elements that validate a trade signal based upon the rules of the RSI BAMM set up.    Again, it is important to remember that this illustration represents an ideal model and a technical framework to provide a set of guidelines that attempts to quantify precise technical events and to optimize overall trading decisions.  However, the RSI BAMM strategy in combination with harmonic patterns effectively validates Potential Reversal Zones and improves the overall accuracy of the entire Harmonic Trading approach.  

Step 1: Initial RSI Test of Extreme Bearish Limit.

     In the bearish RSI BAMM scenario, the first step is to identify price action that possesses a Relative Strength (RSI) reading in the extreme zone above 70.  It is important to note that the 70-level for the overbought limit, as well as the 30-level to define the oversold area, were first outlined by Wells Wilder in his book, New Concepts and Trading Systems.  In addition, a 14-period average is calculated from his approach.  

Step 2:  Complete a Bearish M-Type Complex RSI Structure

    The initial focus should be on the formation of the indicator readings in the entire extreme range rather than looking for a specific numeric level.  As I outlined earlier in this chapter for the bullish scenario, it is important to differentiate the two types of indicator structures that form at RSI extremes. 

Two Types of Bearish Indicator Structures

  In much the same vein as harmonic patterns, it is important to classify the general types of indicator structures that form in overbought RSI area.  Although each type could be assigned more specific classifications, indicator readings form either an impulsive or a complex structure.  Typically, most bearish RSI readings that are above 70 will be impulsive in nature and do not yield the required structure to be considered as a valid set up.  However, valid complex structures that are correctly identified offer a tremendous technical advantage because this situation is especially unique and represents a vital potential reversal area within the overall trend of the price action.   Sometimes, a complex RSI BAMM formation can be frustrating because the setup may not ideally unfold following the initial trigger.  This can be particularly frustrating when a potential set up is followed for quite some time and fails to adhere to the RSI BAMM model.  In the same manner that not all patterns form ideally, it is important to wait for only those situations that clearly provide all the required elements to validate the set up.  Regardless, the primary focus of the initial step is to identify a complex the RSI BAMM M-type structure in the extreme area.  

Bearish Impulsive Indicator Structures

A bearish impulsive indicator structure reflects price action that is experiencing a quick test of the extreme overbought resistance area that typically reverses quickly without any consolidating price action.  Since the price action commonly reverses sharply in these cases, the indicator reading rolls over and sinks below the extreme limit under 70 typically within 1 or 2 price bars of the first overbought reading.

    Although such impulsive formations may test the extreme bearish RSI level, it is important to focus on the nature of the indicator structure and not necessarily the exact numeric reading (as long as it is above the 70-limit).  The exact indicator level is critical in quantifying the extreme state of RSI but the general indicator formation is the critical factor, as it serves as the essential trigger to validate a potential trade opportunity.    Impulsive structures can be effective technical measures as they can serve to confirm bearish patterns and other trading signals.  But, it is important to note that the signals generated from extreme RSI readings do not constitute a comprehensive approach to trading the market.  In fact, I believe that this is a common misconception for Relative Strength and most other technical indicators and oscillators.    In my opinion, such technical measures must be utilized as a complimentary methodology rather than as an exclusive approach.  A Relative Strength reading above 70 does not automatically signify a trade opportunity.  In fact, certain extreme impulse structures can signal significant continuations of the predominant trend.  These strategies will be covered later in the book.  For now, it is important to keep in mind that the general types of structures.  Furthermore, as is the case with all technical indicators, other methods must be employed to validate any potential trade opportunity on a multiple confirmation basis.   

Bearish Complex Indicator Structure  

  A complex structure represents an indicator formation that initially exceeds the 70-level and forms an M-type structure entirely in the extreme area.  The complex structure remains above the extreme 70-limit longer than an impulsive formation and it should be distinct from other types of indicator readings. 

  Despite representing a more significant technical condition than an impulsive formation, the bearish complex structure is typically an early trading signal.  In fact, it is common for price action to accelerate to the upside while the complex formation of the RSI reading completes.  Furthermore, the initial reaction to the complex RSI structure may not seem to indicate a change in trend due to such strong price action.  Despite this perceived strength, the validity of the entire RSI BAMM technique is not determined until the M-type structures has entirely formed in the overbought area above 70.  Although the advanced concepts will be clearly presented later in this chapter, it is important to keep in mind that a complex indicator reading is merely the starting point for the entire approach not the defining event of the methodology.

  As the illustration shows, the initial test of the complex indicator formation typically experiences an acceleration of the predominant trend.  Despite the perceived strength of the rally, the complex formation establishes the beginning of the most critical aspect of the entire RSI BAMM methodology – divergence. 

  The bearish divergence occurs when the Relative Strength Index reading weakens while the price action continues to rally.  Although the price action may seem to be maintaining its current uptrend, valid complex RSI structures usually trigger a reversal sooner rather later and mark a critical area for a potential change in the overall direction.  Although a few other elements must fall into place for the RSI BAMM to be validated, the complex RSI structure is the starting point for entire process.  Most important, this is an early signal and it is critical to wait for the M-type structure to break under the 70-line.  After the RSI formation has been completed, the other considerations of potential pattern completions and specific RSI BAMM harmonic measurements can be projected to determine the optimal reversal area. This leads us to our next step, which is the defining and the measuring of the price level for that triggers this breakdown.    

Step 3:  Define the RSI Trigger Bar

    After defining the complex RSI formation, the next step requires a measurement of the price area where the M-type indicator structure has completed.   The price bar that causes the complex RSI indicator reading to complete and to decline below the extreme 70-limit is known as the RSI BAMM Trigger Bar. 

  After identifying the RSI BAMM Trigger Bar, it is critical to mark the top of this price bar by drawing an extended line from the peak, projecting the resistance from the peak to the right of the chart, as is illustrated in the diagram.  This RSI BAMM Trigger Bar resistance level serves as a minimum technical area for the corresponding retest and the anticipated execution area of the completion of the final phase of the RSI BAMM.       

    From a general perspective, the RSI BAMM Trigger Bar denotes the starting point for the critical divergence phase that the entire methodology is attempting to define and to quantify.  Again, the completion of the complex RSI indicator structure is only the starting point of the process.  Although there are strategies that I will present later in this chapter to capitalize on the initial indicator breakdown, from a broader perspective the RSI Trigger Bar can reveal a great deal about the validity of the set up and the state of the potential price action.  For now, the most critical element of the RSI BAMM approach begins after the indicator has reversed from the overbought reading by completing the complex M-type structure.     The position of the Bearish RSI BAMM Trigger Bar in relation to the prior extreme high point is critical.  Although its significance will be further explained later in this section, it is important to remember that the RSI BAMM Trigger Bar typically will be the price bar that is the prior peak of the current move or within a few intervals of the extreme high.  This is critical and the Trigger Bar’s position will determine the execution area for the corresponding retest and completion of the RSI BAMM.