RSI stands for Relative Strength Index. It is a momentum oscillator used to identify trend reversal. RSI was invented by Welles Wilder Junior. The default look-back period for RSI is 14, however, this can be lowered to increase sensitivity and vice versa. RSI calculates strength of stock trend and helps to predict their reversals.
Why to Buy State Bank of India (SBIN)?
There are a lot of trading strategies using RSI; below mentioned is one of the most popular among the trading community which involves buying after completing retracement for higher movement; however, the support of another momentum oscillator, stochastic, can give additional support.
In the last few sessions, RSI had a breakout trading above 50 levels from below and made a high of 75 then after it is trading lower or retracing towards the centerline placed at 50 levels. This behaviour is called ‘RSI PBB’ setup. RSI PBB is pull back buy setup, which indicates once RSI turns its tail upside after taking support from the zone of 45-55 levels, the target is previous swing high of RSI which was 75 or previous swing high of prices.
Currently, SBIN is going through this setup and we expect higher price movement towards previous high Rs 350-360 levels in coming days.
Figure .1. RSI PBB setup and Buy signal on SBIN
- Recent RSI broke out and published swing top around 75 levels.
- After marking high of 75, RSI is retracing back towards mid-line standing around 50 marks.
- Strong bullish candle formation around buying zone will give us confirmation of retracement complete and original trend begin.
- Midterm moving average 50 DMA placed around 300 levels defines midterm trend which augurs well with bulls, as prices have sustained and are trading above it.
- Decent volume participation while forming bullish candle will also give additional confirmation.
Whenever price candle will be near previous swing high which is near Rs 350-360 levels.
Entire bullish view negates on breaching of a swing low and one should exit from a long position. In the case of SBIN, it is standing around Rs 289.
We recommend buying State Bank of India (SBIN) around Rs 310-320 levels with a stop loss of Rs 289 for higher targets of Rs 350 and Rs 360 levels as indicated in the above chart.
(The author is Head of Technical Research at Narnolia Financial Advisors Ltd.)
Disclosure: Narnolia Financial Advisors/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks. The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
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