Momentum trading involves taking advantage of, and making profits from, upward trends in a stock. The strategy makes a calculated bet that the stock market’s recent winners will remain winners.

The Relative Strength Index (RSI) is a popular momentum oscillator that’s used extensively by traders.

The RSI measures the speed and change of price movements, and is primarily used to identify overbought or oversold conditions in the market, helping to determine potential reversal points or trend strength.

Momentum traders also use RSI to help them identify potential entry and exit points.

By understanding whether a market is overbought, oversold, or experiencing divergence, traders can make more informed decisions about when to buy, sell, or hold positions.

 

How does RSI work in practice?

The RSI is calculated using a formula that involves comparing the average gains and losses over a specified period.

Explaining the details is diffiuclt, and time-consuming. It’s suffice to know that an RSI number above 70 means a stock was overbought; and an RSI below 30 indicates that it was oversold.

An RSI above 80 meanwhile is an extremely overbought stock, and an RSI below 20 is an extremely oversold stock.

The RSI can also provides divergence signals, ie; when the direction of the price trend disagrees with the direction of the RSI trend.

For example, a bullish divergence occurs when the current share price makes a new low, while the RSI forms higher lows. This indicates potential upward momentum.

Conversely, a bearish divergence occurs when prices make new highs, while the RSI forms lower highs. This signals a potential downward momentum.

And while most traders use the 14-day RSI, this can be adjusted to suit different timeframes and market conditions.

Shorter periods, such as 9 or 10 days, may provide more sensitive signals but also increase the likelihood of false signals.

Longer periods meanwhile may smooth out fluctuations, but may not respond quickly to rapid changes in price.

 

What the creator of RSI said

Tennessee-born Welles Wilder was the creator of the Relative Strength Index indicator.

In his book “New Concepts in Technical Trading Systems,” published in 1978, he introduced RSI as a tool for measuring the strength of price movements.

The book has provided the market with valuable insights into the application of RSI and other technical indicators in trading.

In an interview not long before his death in 2021, Wilder shared his thoughts on what would make a good trade.

“The trade should be in the major trend direction. It should not have wild gyrations. If possible there should be a nearby support area to provide a reasonable stop,” he said.

A lousy trade, meanwhile, would be a trade against the major and minor trends with wild gyrations, he added.

Asked what his best trade ever was, Wilder said: “The one I remember the most was in the early 70s when I bought $10,000 worth of silver options, and sold then for $40,000 six months later.”

 

ASX stocks with strong RSI numbers

Here a list of ASX small caps with RSI over 70 which may indicate upward momentum:
(data from Commsec)

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Alliance Nickel (ASX:AXN)

Alliance has just nabbed a Major Project Status (MPS) from the Australian Federal Government for their NiWest Nickel Cobalt Project.

This status acknowledges that the project is strategically significant, and has the potential to boost the nation’s economy and job market.

This status also allows AXN to get extra support for navigating through regulatory approvals for the next three years through the Major Projects Facilitation Agency.

 

Horseshoe Metals (ASX:HOR)

HOR recently gave an update on its Lights Copper-Gold Project (HSL) in Western Australia.

The project was where HOR first struck gold (and copper) in the Bryah Basin. It’s about 60 km west of the DeGrussa Copper Mine, which is owned by Sandfire Resources (ASX:SFR).

In the past, this mine already pulled out about 316,000 ounces of gold and 55,000 tons of copper through two rounds of mining.

HOR said that at this moment, there’s about 128,000 tons of copper ready to go at a grade of 1.0% (with a cutoff of 0.5%), plus another 36,000 ounces of gold too.

Apart from the RSI, there are a couple of other indicators used by the market to signal momentum of any given stock, including:

 

Simple Moving Average

Simple Moving Averages (or SMA) is another indicator that can be used to gauge momentum.

SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.

As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.

10 ASX small caps at prices above SMA
(data from Commsec)

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Astron Corp (ASX:ATR)

Astron recently gave an update on its deal with Energy Fuels Resources (USA) Inc on a project called the Donald Rare Earths and Mineral Sands Project in Victoria, Australia.

The two companies have signed some papers in December 2023, and there have been updates in March and April 2024 about how long they have to work out all the details.

Astron says things are going well, and they’ve decided to give themselves until 5pm US Mountain Standard Time on 19 May to finalise everything.

 

The 52-week highs

Traders often view the 52-week highs as entry signals.

This is due what’s called the “52-week high effect” – where if  a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.

On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.

 

10 ASX small caps at 52-week high
(data from Commsec)

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Admiralty Resources (ASX:ADY)

ADY recently announced that its Chilean subsidiary, Admiralty Minerals Chile Pty Ltd Agencia en Chile, just signed up for a port service deal with Puerto Las Losas S.A.

The contract is all about getting Puerto Las Losas’ iron ore concentrate stacked and stored.

The contract officially kicked off on March 5, with all the paperwork all completed on April 17.

 

Sihayo Gold (ASX:SIH)

Sihayo has been rising after announcing an off-market takeover offer from a cashed-up group called Provident Aurum, owned by Indonesian firm Provident Minerals, which happens to be Sihayo’s largest shareholder since 2013.

Provident provided a recent unsecured working capital loan of US$3.9 million to Sihayo, and assistance in connection with Indonesian regulatory approvals.

The proposed offer is at a price of 0.225 cents cash per Sihayo share, and is subject to a number of conditions.