RSI Divergence

An alternative way that the Relative Strength Index (RSI) may give buy and sell signals is given below:

• A trader might buy when price and the Relative Strength Index are both rising and the RSI crosses above the 50 Line.
• Similarly, a trader might sell when the price and the RSI are both falling and the RSI crosses below the 50 Line.

An example of this potential methodology for buying and selling based on 50 Line crosses is given below in the chart of Wal-Mart (WMT):

Relative Strength Index Confirmations & Divergences

Another usage for the Relative Strength Index is to attempt to confirm price moves and attempt to forewarn of potential price reversals through RSI Divergences.

The chart below of the E-mini Nasdaq 100 Futures contract shows the RSI confirming price action and warning of future price reversals:

Low #1 to Low #2

The E-mini Nasdaq 100 Futures contract’s price made a substantial move from Low #1 to Low #2. The RSI confirmed this move, which may have helped a trader have confidence jumping on board the price move higher.

The break of trendline of the e-mini future was also confirmed by the trendline break of the Relative Strength Index, suggesting that the price move may likely be over.

Low #3 to Low #4

A bullish divergence was registered between Low #3 and Low #4. The e-mini Nasdaq 100 future made lower lows, but the RSI failed to confirm this price move, only making equal lows. A trader might see this RSI divergence and begin taking profits from their shortsells.

High #1 to High #2

A bearish divergence occured when the e-mini futures contract made a higher high and the RSI made a lower high. This bearish divergence suggested that prices could be reversing trend shortly. A trader might consider reducing their long position, or even completely selling out of their long position.