RSI Calls This Selloff a Buy

The 14-day RSI for the S&P500 closed back under 70 for the first time in a week. While RSI (relative strength index) is generally considered an overbought/oversold oscillator, studies have demonstrated that overbought readings are generally more bullish than bearish. It can be hard to stomach buying when the indicator is pushing the upper boundaries of its historical range, but the first dip after an overbought reading is usually a solid buying opportunity looking out 1-2 weeks. That’s what Tuesday’s selloff represented. The table below lists each of the last 30 instances in which the RSI closed over 75 for the first time in at least 14 sessions (to avoid any duplicate signals) and then closed under 70. Readings over 75 are generally bullish looking out one month, so an initial pullback under 70 should provide a favorable entry on the long side for an intermediate-term trade. Testing backs up that assumption…

S&P500 14-day RSI Closes <70 after closing >75 Within Last Ten Days
11/04/10 RSI >75… 11/09/10 RSI <70… ???
04/14/10 RSI >75… 04/16/10 RSI <70… Higher S&P five sessions later
03/17/10 RSI >75… 03/19/10 RSI <70… Higher S&P five sessions later
08/03/09 RSI >75… 08/06/09 RSI <70… Higher S&P five sessions later
10/23/06 RSI >75… 10/27/06 RSI <70… Higher S&P six sessions later
11/12/04 RSI >75… 11/16/04 RSI <70… Higher S&P five sessions later
01/05/04 RSI >75… 01/09/04 RSI <70… Higher S&P five sessions later
11/23/98 RSI >75… 11/30/98 RSI <70… Higher S&P five sessions later
03/19/98 RSI >75… 03/27/98 RSI <70… Higher S&P five sessions later
06/12/97 RSI >75… 06/23/97 RSI <70… Higher S&P five sessions later
10/04/96 RSI >75… 10/09/96 RSI <70… Higher S&P five sessions later
02/07/96 RSI >75… 02/15/96 RSI <70… Higher S&P five sessions later
12/05/95 RSI >75… 12/07/95 RSI <70… Higher S&P five sessions later
09/11/95 RSI >75… 09/22/95 RSI <70… Higher S&P five sessions later
06/22/95 RSI >75… 06/26/95 RSI <70… Higher S&P five sessions later
03/24/95 RSI >75… 03/31/95 RSI <70… Higher S&P five sessions later
02/03/95 RSI >75… 02/17/95 RSI <70… Higher S&P five sessions later
08/30/94 RSI >75… 09/01/94 RSI <70… Higher S&P nine sessions later
02/04/93 RSI >75… 02/08/93 RSI <70… No higher S&P 5-10 sessions later
12/08/92 RSI >75… 12/10/92 RSI <70… Higher S&P five sessions later
02/05/91 RSI >75… 02/20/91 RSI <70… Higher S&P five sessions later
05/21/90 RSI >75… 05/25/90 RSI <70… Higher S&P five sessions later
07/31/89 RSI >75… 08/04/89 RSI <70… Higher S&P five sessions later
05/19/89 RSI >75… 05/23/89 RSI <70… Higher S&P five sessions later
01/27/89 RSI >75… 02/09/89 RSI <70… Higher S&P six sessions later
08/10/87 RSI >75… 08/18/87 RSI <70… Higher S&P five sessions later
06/22/87 RSI >75… 06/24/87 RSI <70… Higher S&P eight sessions later
03/23/87 RSI >75… 03/27/87 RSI <70… Higher S&P five sessions later
01/15/87 RSI >75… 01/23/87 RSI <70… Higher S&P five sessions later
02/18/86 RSI >75… 02/19/86 RSI <70… Higher S&P five sessions later
05/20/85 RSI >75… 05/22/85 RSI <70… Higher S&P six sessions later

In 29 out of 30 occurrences stretching back to 1985, the S&P bounced back from its first sub-70 RSI reading to close at a higher level 5-10 trading days later. That 97% accuracy level is significantly greater than the 76% random chance for a higher S&P close 5-10 sessions later in the same period of time. This could also be viewed strictly as a one-week signal, with the S&P higher five sessions later 80% of the time, again significantly above the 56% random odds.

Categories : Archived EOD Commentary, End-of-Day Commentary

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