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A New Usage Form RSI Indicator
Overview of the RSI Indicator
The Relative Strength Index indicator was discovered by Welles Wilder Jr. in 1978 when he published his book, New Concepts in Technical Trading System. The RSI indicator measures the magnitude of recent gains and losses over a specific time period.
The main usages of the RSI Indicator
In John Murphy’s book “Technical Analysis of the Financial Market” the author listed a total of 5 usages for the RSI indictor. However, market practitioners mainly make use of the 3 basic functions of an oscillator. The 3 main usages are
- Extreme Value.
- The Centreline crossover
- Divergence (Failure swing).
Chart 1 Extreme value in RSI indicator
Extreme Value
The RSI is a bounded indicator, which range from 0 to 100. The extreme value is when the indicator’s value rises above 70 for overbought and falls below 30 for oversold situation. When RSI value is above 70, it is a sign of an overbought market condition and a possible reversal in price trend ahead. In the above chart, we can see 2 overbought situations in October 2024 and again in February 2025. There was also an overbought situation in May 2024. These are signs that stock price may have reached a high and there could be a possible reversal in price trend. For oversold situation, there was one in December 2024, where the RSI value reached a low of almost 30. It was a sign that stock price is oversold.
Centreline Crossover
When the RSI line goes above 50 from below, it is a signal to buy. A movement below the RSI centreline at 50 is a signal to sell. Two signals are given in the chart below.
Chart 2 The RSI Centreline crossover signals
Divergence between price and RSI
The RSI is constructed to follow price movement. When price reached a high, you should see the RSI reached a peak as well. However, there are situations where price reached a higher high but the RSI indicator did not register a higher high. Instead, the RSI reached a high that was lower than the previous peak. This is a failure swing or divergence which is a hint that price may have reached a peak and we are could see a reversal ahead.
Chart 3 Divergence between price and the RSI indicator
A New Usage – The RSI Trend
In the above chart (chart 3), you may have noticed that the RSI barely goes into oversold situation in the past 12 months. In the book “Technical Analysis for the Trading Professionals” Constance Brown proposed another usage of the RSI indicator. She states that in a bullish price movement, the RSI tends to move in a range from 40 to the 80/90 zone. In a bear market, the range is usually from 20 to a top end of 55/65 zone. In chart 4, in the downtrend channel, the RSI value reached a top of 55 before declining.
Chart 4 In the bear trend channel, the RSI value stays below 60.
In the uptrend from July 2024, the RSI value did not go below 50, this is a hint of a bullish price trend. Price, ultimate broke above the uptrend channel with a bullish rally in mid-September 2024.
Chart 5 During the uptrend, the RSI value stays above 50.
Chart 6 The RSI value is hinting that BABA is still in a bullish trend.
In the updated chart on 31 March, 2025, the RSI value remains above 40. Using the new RSI knowledge, this could be a hint that Alibaba’s price trend remains bullish. The current decline could be a correction of the previous rally to $148. Keep a watch on the RSI value for hint of a trend change.
Weakness of the RSI Indicator
This indicator is prone to false signals, especially in strong trending periods with its overbought and oversold conditions. As with all indicators calculated with historical prices, it is lagging in nature. Whipsaw in between changing of trend is also a weakness for this indicator.
