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TA Challenge: How does RSI tell whether a stock is overbought or oversold?
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joined discussion05/02/2022 16:57

Overbought And Oversold

    RSI is a great indicator as it can show moments of oversold and overbought conditions. When RSI value is near or above 70 it is in overbought territory. Conversely when RSI value is near or below 30 it is oversold. These areas can indicate a flip in price action in the near future.
     You can see many instances where overbought and oversold instance cause a short term flip in the price action. It is not always spot on but RSI is useful in these instances.
Overbought And Oversold
     Some consider the fifty value on RSI a turning point in the price action's trend. During a healthy rally RSI will stay above the fifty value continually bouncing off of this value when it looks like the uptrend might end. Similarly in a solid downtrend RSI will stay below the 50 value.
     You can see on this chart of SPY that RSI stays above 50 during a healthy uptrend.
Overbought And Oversold
Overbought And Oversold
     In a downtrend RSI value can regularly stay below the 50 value.
Overbought And Oversold
Overbought And Oversold
     It can be useful to use MACD and KDJ in conjunction as they give you a longer term and shorter term picture of price trend and may help to point out false oversold and overbought conditions.
     In the chart directly above you can see RSI flipping to a downtrend after remaining in overbought territory for some time. MACD flipped to bullish territory at the same time somewhat confirming this flip in price action.
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