Here's
what Welles Wilder has to say
about using RSI:
"One
of the most useful tools employed
by many technicians is the momentum
oscillator. The momentum oscillator
measures the velocity of directional
price movement. When the price
moves up very rapidly, at some
point it is considered overbought;
when it moves down very rapidly,
at some point it is considered
to be oversold. In either case,
a reaction or reversal is imminent.
The slope of the momentum oscillator
is directly proportional to
the velocity of the move. The
distance travelled up or down
by the momentum oscillator is
proportional to the magnitude
of the move."
Wilder
indicates five factors in interpreting
RSI alongside price:
- Tops
and bottoms: When RSI
goes above 70 or below 30.
RSI usually tops out or
bottoms out before the actual
market, giving an indication
of imminent reversal, or
at least reaction.
- Chart
formations: Patterns,
including tops or bottoms,
triangles and trendline
breaks.
- Failure
swings: when the RSI
goes above 70 or below 30
but fails to exceed the
previous high or low.
- Support
and Resistance: support
levels in RSI are often
analogous to those on the
price chart.
- Divergence:
divergence between price
action and the RSI is a
very strong indicator of
market turning points.
For
detailed information see the
report on RSI
