RSI and momentum
RSI scores recent gains against recent losses from 0 to 100. Extremes measure momentum, not mispricing.
What it measures
The Relative Strength Index compares the average size of up moves to the average size of down moves over a lookback, usually 14 periods, and maps the result onto a 0-100 scale. Above 70 is conventionally called overbought; below 30, oversold.
Those labels are unfortunate. A high RSI means price has been rising strongly and persistently — which is what happens during the best parts of strong uptrends. Strong stocks can hold RSI above 70 for weeks while continuing to climb.
Context decides meaning
In a range, RSI extremes often coincide with reversals at the range edges. In a trend, they usually mark continuation. The indicator does not know which regime you are in — you have to supply that from structure.
Divergence
Bearish divergence is price making a higher high while RSI makes a lower high: the new high came with less momentum. It is a caution flag that can persist for a long time, and it is not an entry signal by itself. Confirmation comes from price structure breaking.
Worked example
Overbought is not a sell signal
- A stock breaks to new highs; RSI(14) reaches 78.
- Selling purely on 'overbought' exits the position at $60.
- The uptrend continues for seven weeks; RSI stays between 65 and 82 as price reaches $79.
- The actual structural exit came later: a break of the most recent swing low at $71, with RSI then falling through 50.
Use RSI as a description of momentum strength and to spot divergence. Let price structure, not the 70 line, trigger decisions.
Common misconceptions
“RSI above 70 means sell.”
It means momentum is strong. In uptrends elevated RSI often persists while price keeps rising.
“RSI below 30 means a bargain.”
Persistent weakness keeps RSI low. Oversold readings in downtrends frequently get more oversold.
Checkpoint