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EJStockman asks a good question: " Bill, I'm sure you saw LEXR plummet on poor earnings and the rate hike yesterday. How can one use the RSI on a stock like this, with a buyer waiting in the wings at a price higher than the price at which the stock is now trading? Are the principles the same, or do you throw it out because of the buyout and potential buyout activity?"

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I use RSI (Relative Strength Index) as a technical indicator for seasoned stocks that trade on the basis of what Graham & Dodd or Warren Buffett would call investment fundamentals. I also use RSI to determine changes in institutional money flow into and out of homogenous stock groups or industries, like the precious metals, homebuilders, oil drillers, etc.

Certain stocks I follow are what I consider to be of the speculative variety, and these are subject to extreme moves for a variety of reasons. LEXR is one of those, which as I indicate is the basis of a contested take-over by Micron (NYSE: MU).

In cases like these, RSI may not be effective at all, especially if there is major news that, prior to its release, is closely held by the insiders. That by the way is a legal obligation, but is not always practiced.

But, essentially, RSI is helpful to me where extreme over-bought conditions (say where RSI is above 70 or 80) or extreme over-sold conditions (say where RSI is below 20 or 30) appear to be reversing.

Within RSI, I follow the different time horizons from 5-minute price series data, through 60-minute, daily, weekly and monthly, to see price motion more clearly than by looking at individual charts without the indicator.

My favorite tool is to remove the price series data altogether and just overlay the squiggly RSI lines " say for the Daily data " (one on top of another) of a dozen or more stocks in an industry group. And when I see extreme over/under-bought conditions reversing, I get a sense that the Gnomes are moving out of or into these stocks.

If as a professional money manager of say a billion dollars, responsible for say precious metals (or whatever), you pretty much know the key drivers of price for that industry. What you don't know is how and when your peers are reacting. And your job depends on out-performing your peers. So you watch RSI.

At cycle tops you write calls against some of your long positions, or sell some positions outright. You write puts or make purchases at what you perceive as a bottom. Always you are trying to lower your cost base for your core holdings, so that your cash on cash return from dividends exceeds your cost of capital.

That is an investment process where you use trading tactics to manage your portfolio.

Speculation on the possibility of a Carl Icahn et al affecting the planned MU take-over of LEXR is a different exercise. You can just do flat speculation or you can arbitrage the stocks in play, which requires skill, knowledge and near-term focus.

In the case of the latter (i.e., extreme focus), there are days go by where I cannot phone or manage orders/trades by the minute. So I don't play the arbitrage game against people who have the resources to easily beat me.

As for flat speculation based on a simple concept, I write about it (LEXR, TASR, etc) because (i) I know a large percentage of readers enjoy speculating, and (ii) frankly it's an intellectual change of pace for me, which keeps me from burning out. I'd rather do that than say jabber on about football scores or the Final Four stuff or whatever.

But what I try to do well is manage portfolios based on assessing the various market drivers (fundamental, quantitative, technical, and macro-economic), interrelating them, and forecasting trends and cycles.

The latter is all-important to me because we trade prices. Re Lexar Media, I'm not an industry analyst who goes to all the trade shows, knows all the key people, follows the private equity money behind each company or each technology (e.g., flash memory), and so forth. I try to have a high-level (i.e., not detailed) understanding of what's going on there in enough individual markets that across the board I have a sense of what traders are doing, how they are feeling, etc.

I'm never going to "own" Lexar. I'm just going to trade LEXR. If I can make say a +5-pct gain in say two or three weeks, that's better than the typical risk-adjusted return that 98-pct of professional traders earn, and if I do that with frequency, then I'm going to stay in the top 5-pct of all pro traders. That's my goal.

When I short XLF into strength; sometimes that doesn't work out. But at least I wasn't speculating. I was trading professionally. Trading skillfully is the key to winning, or let's say succeeding at your objectives.

Part of that skill, I guess, is knowing when to use RSI.