While there are hundreds of stock market indicators and oscillators, most investors and traders only need a few. One of the most popular oscillators is RSI . Created by a brilliant engineer, Welles Wilder, RSI tells when an index or a stock is overbought or oversold. Like most “bounded” oscillators, it has a reading from 0.0 to 100.0 on the chart.
The purpose of RSI is to let you know if a market or stock is overbought or oversold and may reverse. It doesn’t mean that the security will reverse with 100% certainty, but it does indicate it’s in the danger zone. The screen shot was taken after the market closed on July 30. RSI as of the close on Aug. 6 rose to 71.1 on the weekly chart, which is extremely overbought. This doesn’t mean to sell everything but it does signal caution as stocks may reverse course — and soon. For comparison, the latest Nasdaq Composite COMP, +0.04% weekly RSI is 66.37 while the Dow Jones Industrial Average DJIA, +0.04% is at 66.31.
While some investment professionals preach that you cannot time the markets, in reality, a hard and fast plunge in RSI is an important tell, one that should not be taken lightly or ignored. Always confirm with other indicators before acting.
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