ConnorsRSI
The First Quantified Oscillator for Traders
ConnorsRSI is a composite indicator consisting of three components. Two of the three components utilize the Relative Strength Index (RSI) calculations developed by Welles Wilder in the 1970’s, and the third component ranks the most recent price change on a scale of 0 to 100.
Taken together, these three factors form a momentum oscillator, i.e. an indicator that fluctuates between 0 and 100 to indicate the level to which a security is overbought (high values) or oversold (low values).
Price Momentum
RSI is an excellent way to measure price momentum since it compares the magnitude of a stock's gains to the magnitude of its losses over some look‐back period. Our previous research has shown that using shorter look‐back periods makes RSI more effective in predicting short‐term price movements.
By default, ConnorsRSI applies a 3‐period RSI calculation to the daily closing prices of a security.
Duration of Up/Down Trend
When the closing price of a security is lower today than it was yesterday, we say that it has “closed down”. If yesterday’s closing price was lower than the previous day’s close, then we have a “streak” of two down close days. Our research has shown that the longer the duration of a down streak, the more the stock price is likely to bounce when it reverts to the mean. Likewise, longer duration up streaks result in larger moves down when the stock mean reverts. In effect, the streak duration is another type of overbought/oversold indicator.
Relative Magnitude of Price Change
The final component of ConnorsRSI looks at the size of today’s price change in relation to previous price changes. We do this by using a Percent Rank calculation, which may also be referred to as a “percentile”. Basically, the Percent Rank value tells us the percentage of values in the look‐back period that are less than the current value. We are comparing today’s return to the previous 100 returns, or about 5 months of price history. To reiterate, large positive returns will have a Percent Rank closer to 100. Large negative returns will have a Percent Rank closer to 0.
Test Results
The final ConnorsRSI calculation simply determines the average of the three component values.
You can see that as the ConnorsRSI value goes below 20, the 5‐day returns begin to increase substantially. Stocks with a ConnorsRSI value in the range of 0 to 5 (the 0 bucket) experienced an average price increase of 2.28% over the next five trading days.
We see the inverse behavior at the top end of the ConnorsRSI range: as the value moves above 80, the 5‐day returns are increasingly negative, with stocks in the 95 bucket showing a 1.42% price decrease over the following five days.
Compare ConnorsRSI to 2-Period RSI
Here is just one set of simulated test results showing long-only results for both ConnorsRSI and 2-period RSI.
Back-test data from Jan. 2001 through July 2012, all highly liquid stocks. You can see why we are moving all our research over to this 'next-generation' improvement of traditional forms of RSI.