RSI: The Momentum Speedometer

In late February 2020 — the first leg of the COVID crash — the S&P 500's daily RSI plunged below 20, only its second reading that deep in years. The index kept falling for three more weeks anyway. On March 23, price made a lower low while RSI held a higher low — a bullish divergence visible at that close; only in hindsight do we know that day was the final low. But here's the honest lesson: an extreme RSI reading told you momentum was stretched — it did not tell you the bottom was in. Oversold markets can stay oversold, and many do.

RSI is a dashboard gauge: it can show the engine running hot or cold, but it can't tell you where the road goes next. Let's read it properly.

What Is RSI?

The Relative Strength Index, developed by J. Welles Wilder in 1978, measures the speed and size of recent price changes on a scale of 0–100. Think of it as a momentum speedometer:

• Above 70 — running hot ("overbought")
• Below 30 — running cold ("oversold")
• 30–70 — a normal range

"Overbought" and "oversold" describe momentum, not value — and neither is an instruction to do anything.

Reading RSI Extremes and Divergences

The examples below are illustrative and chosen in hindsight — not predictions or recommendations.

Extreme readings. In December 2018, Apple's RSI reached the high-teens as the stock sold off sharply. In hindsight price later recovered — but plenty of deeply oversold stocks keep falling. A low RSI flags that selling has been fast and heavy; it is not, by itself, a reason to buy.

Bearish divergence. Near Bitcoin's late-2021 high, price made a higher high while RSI made a lower high. That "bearish divergence" is a classic way traders note that upside momentum is fading — a caution flag, not a certainty. (Bitcoin did decline substantially afterward; divergences also resolve the other way.)

Bullish divergence. In late 2022, Amazon made a lower price low while RSI made a higher low — the mirror image, often read as selling pressure easing. Again: a clue to watch, not a signal to act.

A Useful Wrinkle: RSI Ranges Shift

RSI behaves differently depending on the larger trend. In strong uptrends it tends to live higher on the scale (roughly 40–80); in downtrends, lower readings (roughly 20–60) can be normal rather than exceptional — which helps avoid mislabeling an ordinary downtrend as "oversold." Analysts have documented this range-shift behavior for decades (Technical Analysis for the Trading Professional is the classic reference).

How Traders Use RSI (the caveats matter)

• Never in isolation — pair it with trend, price levels, and volume.
• Extremes over mild readings — a reading near 20 or 80 carries more information than one near 45.
• Higher timeframes carry more weight — a weekly divergence is studied more than a daily one.
• It struggles in strong trends — RSI can sit "overbought" or "oversold" for a long time while a powerful trend continues. Betting against strong momentum on RSI alone is a common way people get hurt.

Settings

The default is 14 periods — a widely used starting point. Shorter settings (7–9) react faster but give more false readings; longer settings (21–25) are smoother with fewer. Beginners are usually fine leaving it at 14.

Practice

Open any stock chart in Ticker Coach, add RSI, and find moments where it hit extremes or diverged from price — then study what happened next, including the times it didn't work. The failures teach as much as the successes.

Key Takeaways

• RSI measures momentum on a 0–100 scale.
• Overbought/oversold describe momentum, not value — and are not signals to act.
• Divergences are widely watched caution flags, not guarantees.
• RSI is least reliable in strong trends.

Remember: RSI doesn't predict the future. It tells you when price momentum looks stretched — one input among many, and never a substitute for managing your own risk.