The Full Dynamic Range RSI Cycles are a proprietary product developed by MCM which measures the RSI without incorporating a time component. It is fully price dependent and it moves with 6 tick range bars, being possible that one bar is a 1min bar or a 10min bar or any time frame in between.
The RSI Cycles point out, first of all, the cycle movements. For the basic info on cycles, please read the following article: http://mcm-ct.com/blog/weekly-charts-explained/
Apart from following the Cycle movement, the RSI Cycles contain a few more interesting tools. Below is a zoomed-in chart of the RSI Cycles which points these out.
First, at the bottom of the chart there is the directionality tool (point 1). At point 2 you can see the arrows pointing at the overbought (dark red) and oversold ranges (light cyan). These are calculated levels at which the market participants would perceive the price as being too high or too low, meaning oversold or overbought condition, at any particular time. These work and move similarly to the Bollinger bands and when the price touches either, the bars will appear highlighted - oversold condition with cyan color (point 3) and overbought with red color (point 4). As it can be seen, an oversold or overbought bar does not mean that the market will stop and reverse immediately and the condition can persist for a while, however it is an indication that the market is perceived as being in an extreme situation and usually this is corrected, either through a reversal or a side-ways movement. As it can be seen in the example, the market moved from oversold to overbought very quickly and finally the overbought condition resolved lower.
At point 5 there is an example of how the different signals are reinforcing each other. The market was in an overbought condition immediately after breaking above the resistance (magenta line) which meant that the up impulse generated had low odds of turning into a true impulse. Additionally the directionality tool reversed from the highs and went at the lower line and stayed there. The impulse up was reversed quite quickly afterwards and the RSI Cycles oscillated for a while, until point 6 when it broke into a down impulse.
The cyan line which moves between the 2 ranges is the mcm-Moving Average (MA). An impulse is confirmed only after the mcm-MA moves above (or below) the break-out level - we can see it confirmed the up impulse at point 5 by breaking above resistance and also at point 6 by breaking below support.
An important addition to the RSI Cycles has been done this week, through the introduction of the mcm-CCI line (at the bottom, below the directionality tool). That is a proprietary tool which shows the character of the market - bullish or bearish. It moves between +300 and -400, with 0 being the dividing line. When the mcm-CCI is below 0, the character of the market is bearish. When it is above 0 - it is bullish. Additionally the color of the line shows how strong that inclination is - the brighter the green the more bullish, the darker the red - more bearish. There are several ways in which the mcm-CCI can be used, apart from showing the character of the market in any given time. These are the following:
- When the mcm-CCI is testing 0 - that is a significant event and is usually followed by a strong reaction. For example if it comes from a negative value and breaks above 0, that is a warning that the tides are changing and more bullishness is coming.
- When the mcm-CCI is testing a round number (+100, +200, -100 etc). Failing at one of these numbers usually triggers a strong reaction, as is breaking one (not as significant as 0 though)
- When mcm-CCI is approaching an extreme level - either close to +300 or to -400. That is a sign that the market is at an extreme and a reversal is not far away. When the mcm-CCI is close to +300 and then heads lower, the confirmation that a reversal happened usually comes if it then breaks below +100, so one does not need to wait for 0 to break (usually that will happen as well, but breaking below +100 is confirmation).
- When the mcm-CCI is diverging from price. For example price is making lower lows, but mcm-CCI is making higher lows. That is a sign that a reversal is near. The bigger the divergence, the stronger the signal. A difference in mcm-CCI of more than 50 points would be considered a strong divergence.
Below, there is one example which illustrates how powerful this tool is, especially when viewed in the context of the other RSI tools.
In the chart below we can see that the market never changed its bearish character, not even after the big reversal from oversold (around 1925) to overbought (around 1945). At point 1, at the highs we can see that when the market was trying to break into the up impulse, the mcm-CCI was testing the 0 level. And it failed. That failure combined with the overbought condition of RSI Cycles bars immediately after the up impulse was attempted and the directionality tool reversing from top to bottom were very strong signals that the impulse up would fail. Which is exactly what happened at point 2, when the price went below the break-out level and a support level (cyan) was generated. After that the market oscillated for a while, but the weak character was shown not only by mcm-CCI, but also by the fact that the support levels were broken, while the resistance levels were respected. Finally at point 3, the market broke into a down impulse, confirmed by the mcm-CCI which went lower and the directionality tool. At point 4, a divergence between the mcm-CCI and the market price started. While the market made lower lows, the mcm-CCI made a low slightly below -300 and then started to move up, making higher lows. The fact that the down impulse is unwinding (had a bearish retrace - BR - and an END) at the same time, means that the trend is likely changing and a bounce is expected. The down impulse will likely need a 2nd or even a 3rd END to completely unwind, but a reversal is expected nonetheless.