I have seen a lot of talk lately about RSI being overbought as it crosses the 70 level. I often get some pretty heated feedback when I post my charts suggesting something has room to move higher when the RSI is near this level. Many technicians and traders take this as a reason to worry or avoid a trade, today I want to show you why that might not be the best way to look at it. I will admit, it is not easy to buy up here and you certainly can have a pullback at any time, but I have found that some of the best breakouts and strongest runs don’t even start until you get over this level. Many of you know already know that I use RSI more for trend following than as an oscillator. This is based on Bull and Bear Range Rules (from the RSI Series) that I use to define the trend. I have also written about how we can see a chart accelerate higher when the 9sma of RSI moves above 60. Keeping it very simple, today let’s just deal with the indicator itself.
First we need to think about how this indicator is calculated (note Investopedia totally disagrees with what I am telling you here). Any indicator that is bound from 0 to 100 will slow its ascent (descent) as it reaches an extreme. This allows price to move much great distances than the oscillator will. I think this is the key most overlook when using an indicator such as RSI.
Below I have quite a few recent examples that will show how well this can work. Of course it won’t all the time, but that is what your risk management plan is for. All of these charts have lines through the point at which RSI moved over 70. You will notice, it doesn’t have to stay over 70 for the run to continue. Part of my risk management plan is making sure it stays over 50 (marked by arrows in some charts) on any pullbacks. 40 is the actual threshold for the bull range, so longer term traders and investors or those with big cushions in the trade are better using that number. (click on chart to open larger in a new window)
Yes, it also works on weekly charts.
The arrow on the above daily chart of $TSLA lines up with the arrows on the weekly chart
$LNG another good example.
It can be an amazing move. I have a dozens of charts like this from a scan I did today, but this post is already getting long so I will end with a chart you should think about in context of this post.
What is next for the $GOOG?
Good Luck, it is there for the making!