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TA Challenge: How does RSI tell whether a stock is overbought or oversold?
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SpyderCall joined discussion · May 2, 2022 03:57

Overbought And Oversold

RSI is a great indicator as it can show moments of oversold and overbought conditions. When RSI value is at or above 70 it is in overbought territory. Conversely, when RSI value is at or below 30 it is oversold. These areas can indicate a reversal in price action in the near future.
You can see many instances where overbought and oversold conditions lead to a short-term reversal in the price action. It is not always spot on, but RSI can be useful in these instances.
Overbought And Oversold
Some consider the 50 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 just when it looks like the uptrend might be ending. 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 will 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 bearish territory at the same time somewhat confirming this reversal in price action.
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SpyderCall
Trade the trends via technical, fundamental, and macro analysis. Day Trades, swing trades, and long-term investments.
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