RSI

What is the RSI? RSI stands for the Relative Strength Index and it measures the speed and strength of the price movement of a stock or index. What this means is that RSI can be a measure if a stock or index is over bought or over sold.

The RSI is on a scale from 0 to 100 and is calculated off the close price, so if you have your chart set to 1 Day intervals then the RSI is the daily RSI.  How the RSI is calculated isn’t that important as long as you know what it is telling you.   The lower the RSI is the more over sold the stock is and the higher the RSI is the more over bought the stock is.

Should you blindly trust the RSI? No but it also depends on what stock or index you are using the RSI to measure. Many markets are mean reverting, what this basically means is that if they get too over bought or too over sold that they will tend to move towards a more normal price. So should you just buy when the RSI is “over sold” and sell when RSI is “over bought?” There is a quote by  John Maynard Keynes “The market can stay irrational longer than you can stay solvent.” What does this mean in terms of RSI? The RSI can stay high and even go higher more then would seem possible and cause your account significant pain.  A stock like Amazon (AMZN) or Tesla (TSLA), that is fueled by emotions and technicals more then fundamentals, can continue to go up as the RSI is indicating sell and even when it pulls back it may be shallow. The point is to use the RSI as another arrow in your quiver.

 

Bob Bullock

Contributing Writer