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I am an amateur investor that loves your approach to investing and the explanations you provide for decisions made. I feel that stocks move on “momentum” when fundamentals and technicals are favorable. Isn’t the RSI a “momentum” indicator?

By Matt McCallAug 01, 2017

Thanks for your kind words! The relative strength index (or RSI) is a technical indicator that serves as an overbought/oversold oscillator to measure a stock against itself. It could be considered a momentum indicator when it is moving in one direction, but I wouldn’t put that label on it. There are many times when the RSI moves sideways in overbought territory as a stock remains in a very strong uptrend. In that situation, it would not be a reliable measure of the stock’s true momentum. This can also be said for when a name is falling and the RSI is low.

However, momentum does come into play when using the RSI to identify buy signals. The index is a scale of 1 to 100, and when the RSI moves out of oversold territory (0-30) and back into the neutral zone (30-70), it creates an RSI crossover buy signal. Out of all the daily scans I run, the one that has produced the most winners has been the RSI crossover scan. By identifying stocks that have an RSI that is moving from oversold back into neutral, I can zero in on a chart that is starting to gain bullish momentum.

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