RSI is a momentum oscillator that measures the speed and magnitude of recent price changes. It helps identify overbought and oversold conditions.
If average gain over 14 days is 2% and average loss is 1%, RS = 2. RSI = 100 - (100 ÷ 3) = 66.7.
RSI above 70 = overbought (may be due for a pullback). RSI below 30 = oversold (may be due for a bounce). RSI divergences from price are powerful signals.
In late December 2022, the S&P 500 made a new low near 3,800, but its 14-day RSI printed a reading of ~28 — higher than the October low's RSI of ~22. This bullish divergence correctly signaled the start of a major rally that pushed the index above 4,700 by mid-2024.
Conversely, Nvidia in March 2024 saw RSI hit 88 (extreme overbought) while price kept rising. The stock didn't immediately crash — it consolidated for 6 weeks before resuming its uptrend. This shows why RSI above 70 doesn't mean "sell immediately" in strong trends.
| RSI Range | Signal | Typical Action |
|---|---|---|
| 0–30 | Oversold | Watch for bounce; don't auto-buy |
| 30–50 | Weak / Bearish | Trend still down, wait for 50 cross |
| 50–70 | Bullish | Healthy uptrend |
| 70–100 | Overbought | Strong trend; divergence = danger |
💡 Pro Tip: The strongest RSI signals come from divergences. A bullish divergence (price makes a lower low but RSI makes a higher low) has a roughly 70% success rate for calling tradable bottoms. Bearish divergences (price higher high, RSI lower high) are equally powerful at calling tops.
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Yes, in strong trends RSI can stay above 70 for weeks. This is why RSI works best in ranging markets and should be combined with other indicators. During the 2020 bull market, many tech stocks had RSI above 70 for months while prices kept climbing.
What time period should I use for RSI?
The standard is 14 periods (days for daily charts). Short-term traders use 9-period RSI for faster signals. Long-term investors may prefer 21 or 25 periods for smoother readings. Shorter periods generate more signals but also more false signals.
What's RSI divergence?
When price makes a new high but RSI makes a lower high, that's bearish divergence — momentum is weakening. Bullish divergence is the opposite: price makes a new low but RSI makes a higher low. Divergence is one of the most powerful RSI signals and often precedes trend reversals.