If you truly want to make money in the markets, pay attention to fear and greed.
Remember, most investors are irrational. They buy because everyone else is. They sell because everyone else does. And in doing so, they send stocks up, or even down far too much. If you can spot those very overreactions, you can do very well in the markets.
The best way to that is by also paying attention to technical pivot points, such as MACD, or moving average convergence divergence, and relative strength (RSI).
Relative Strength Index (RSI)
The Relative Strength Index (RSI) acts as a momentum indicator which helps measure the value of the latest price changes. It helps us determine if a coin or even a stock is oversold or overbought by watching its range between 30 and 70.
Moving Average Convergence Divergence (MACD)
MACD is calculated using the difference between a short-term and long-term trend and momentum behind a stock (typically 12-day and 26-day moving averages are used). With MACD, when the short-term line moves above the long-term line, we can make an argument for higher moves in the stock. We can predict a lower move when the short-term line crosses under the long-term line. With MACD we’re simply looking for unsustainable, big moves.
It's much easier to show you them in action, though.
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Remember, all we’re looking for are extreme, unsustainable moves in both.
Let’s look at a two-year technical chart of Intel (INTC) for example with RSI and MACD. Notice what happens when RSI dips to or below its 30-line, as MACD unsustainably dips below its mean. About 80% of the time, shares of Intel have pivoted higher.
Now, take a look at what also happens when RSI moves to or above its 70-line, as MACD pushes well above its mean. Again, up to 80% of the time, the stock will pivot lower.
Then again, you never just want to rely on MACD and RSI as sole indicators.
The best thing to do is confirm with other momentum indicators, such as Bollinger Bands (2,20), Williams’ %R (W%R), and even Money Flow (MFI).
This is probably one of the easiest ways to spot pivots in markets, especially on fear and greed.
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