Relative Strength Index (RSI) Interpretation

Extreme Readings and Failure Swings. Any time an RSI (Relative Strength Index) moves above its overbought zone or below its oversold zone, it indicates that the security in question is ripe for a turn.

Extreme Readings and Failure Swings. Any time an RSI (Relative Strength Index) moves above its overbought zone or below its oversold zone, it indicates that the security in question is ripe for a turn. The significance depends upon the time frame under consideration. An overbought or oversold reading merely indicates that, in terms of probabilities, a countered action is over­done or overdue.

It presents an opportunity to consider liquidation or acquisition, but not an actual buy or sell signal. This can come only when the price series itself gives a trend-reversal signal.

For instance, if a security is overbought and was confirmed by a nice trend break in the price. Compare to the oversold reading that was not confirmed by a price break and did not generate any meaningful rally.

More often than not, the RSI (Relative Strength Index) traces out a divergence. These divergences are often called failure swings.