RSI is a popular oscillator. It measures relative changes between the higher and lower closing prices. Its author used 14 days but a 9 day period is most popular today.
RSI can be used as an overbought/oversold indicator. Levels of 70 or more (bearish signal) are overbought and 30 or less (bullish signal) are oversold.
RSI’s advantage unfolds using it as a divergence indicator. If the price is making new highs but RSI fails to surpass previous high this may be an indication of a forthcoming reversal. When the RSI then turns down and falls below it most recent trough it is said to have completed a “failure swing” which serves as a confirmation of the forthcoming reversal.

Illustration of RSI divergence

Illustration of RSI overbought levels

Illustrations of RSI oversold levels

Watch the video to visualize the use of RSI divergence.

This entry was posted on Wednesday, March 14th, 2007 at 8:17 am and is filed under Technical Indicators. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.