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Relative Strength Indicator (RSI)

Did you know that you can actually check the strength of a stock The RSI or Relative Strength Indicator does just that. It is a measure the strength of a given stock. Just like the MACD the RSI is an oscillating indicator. This means that it will show the movements up and down over time. It oscillates with the momentum of the stock.

The indicator is set by entering a number of periods (typically days) for the indicator to use as a frame of reference. The RSI then checks the average of the stock's highs against the average of the stocks lows. This gives you a number somewhere between 0 and 100. 

Stockcharts and other services will say that a number over 70 means the stock is overbought while a number under 30 means it is oversold. This is true to a degree but as I have said with the other indicator commentary you can not rely solely on one indicator to tell you the complete story. 

Many stocks which are trading above all levels of resistance will show as overbought. That would typically be a bearish signal. However since there is no resistance many stocks will continue going up so the RSI alone cannot predict a bullish or bearish move. 

The RSI is also like the MACD where there maybe signs of either bullish or bearish divergence. If a stock is continuing to rise while the RSI begins to decline that is bearish divergence. If a stock is continuing to drop while the indicator makes a positive move that is a bullish divergence. 

Lastly the RSI can be used to find stronger stocks in a weaker market. If the general market is in decline but a particular stock or sector is not going down check the RSI. Chances are the RSI will be looking good. Strong stocks in a down market are typically your best performers when the market turns around.





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