Welles Wilder introduced the Relative Strength Index in 1978. RSI is widely used as an overbought/oversold indicator. It compares the amount of a security’s recent gains to the amount of its recent losses on a scale from 0 to 100.
Normally, if the RSI rises above 30 it is considered a bullish signal and if the RSI falls below 70 it is seen as a bearish signal.
Another form of RSI analysis involves looking for a divergence. If the security is making new highs and the RSI fails to exceed its previous high, this can signal a reversal. When the RSI then turns down and falls below it’s previous low, it suggests a reversal to the upside.
RSI belongs to a popular group of technical indicators known as Oscillators.
Chart courtesy of Prophet Financial Systems