By Matt McCallOct 12, 2017
You’re absolutely right. The relative strength index – more commonly referred to as the RSI – is one of my favorite indicators on a stock chart. It’s an overbought/oversold oscillator that measures a stock or index against itself.
Don’t confuse it with relative strength, which is very different as it measures one chart against another to determine the stronger. The RSI is a formula that helps determine if a stock has run too much to the upside or fallen too far to the downside. There are a few different time settings you can use with RSI. My preference is the 9-day period setting, which takes the last nine trading days into consideration to determine the RSI number.
While I could talk for hours on how I use the RSI in my research, it really excels in identifying 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. This type of signal only occurs a few times each year on the S&P 500, but its success rate of calling a bottom is well above 80%.
I run screens for stocks that are generating RSI crossover buy signals often. A fair number tend to come up, and that’s when I dive deeper into my analysis. The strict criteria I use eliminate those that aren’t worth our time and point toward those with promising potential. I put them on my watch list, and from there I simply wait for the right time to buy.
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