The RelativeStrength Index (RSI) is a popular momentum oscillator that was developed by J. Welles Wilder. The RSI compares the magnitude of a stock or index’s recent gains to the magnitude of its recent losses and converts this information into a number that ranges from 0 to 100. Below is an example of the DOW index with its 20, 50, 100 and 200 day simple moving averages (SMA), and the RSI oscillator.
There are a few ways to interpret and use the RSI:
Oversold/Overbought: If the RSI falls below 30 the stock/index is oversold, and if the RSI rises above 70 it is overbought. Additionally, if the stock/index trends above 30 it is considered bullish, and if the RSI trends below 70, it is a bearish signal. Some traders identify the long-term trend of a stock/index and then use extreme readings of the RSI as entry points. For example, if the long-term trend of a stock/index has been bullish, then a temporary RSI reading near 30 could mark a potential entry point.
Center-line crossover: The center-line for RSI is 50. A reading above 50 indicates that average gains for the stock/index are higher than average losses, and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.
As we can see for the DOW index chart above, the RSI dipped below 50. As a result, the RSI is telling us that average losses have been higher than the average gains over the last few weeks and sentiment is currently slightly bearish.
The Relative Strength (RSI) Index
The Relative Strength Index (RSI) is a popular momentum oscillator that was developed by J. Welles Wilder. The RSI compares the magnitude of a stock or index’s recent gains to the magnitude of its recent losses and converts this information into a number that ranges from 0 to 100. Below is an example of the DOW index with its 20, 50, 100 and 200 day simple moving averages (SMA), and the RSI oscillator.
There are a few ways to interpret and use the RSI:
Oversold/Overbought: If the RSI falls below 30 the stock/index is oversold, and if the RSI rises above 70 it is overbought. Additionally, if the stock/index trends above 30 it is considered bullish, and if the RSI trends below 70, it is a bearish signal. Some traders identify the long-term trend of a stock/index and then use extreme readings of the RSI as entry points. For example, if the long-term trend of a stock/index has been bullish, then a temporary RSI reading near 30 could mark a potential entry point.
Center-line crossover: The center-line for RSI is 50. A reading above 50 indicates that average gains for the stock/index are higher than average losses, and a reading below 50 indicates that losses are winning the battle. Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.
As we can see for the DOW index chart above, the RSI dipped below 50. As a result, the RSI is telling us that average losses have been higher than the average gains over the last few weeks and sentiment is currently slightly bearish.