Finding the End of a Trend with the Relative Strength Index

The Relative Strength Index is technical analysis indicator that may hold clues for the end of a market trend. Strength Index
2 min read
Photo by

Relative Strength Index may hold clues for the end of a trend.

Growing up in the Midwest, kids learn very quickly the difference between a tornado watch and a tornado warning.

A watch means that conditions are right for a tornado to form, but one hasn’t been spotted yet. A warning means head for the coal cellar because tornados are spinning nearby.

Technical analysis indicators like the Relative Strength Index (RSI) can act as watch signals for stocks, giving investors a heads up that although things appear normal, potential changes may be coming soon.

What It Says

The RSI compares average prices of days when the stock closes higher with days where the stock closes lower. The RSI line will rise and fall with the stock price in between a range of 0 and 100. When the RSI line rises above 70, the stock is considered to be “overbought,” meaning that its price might be a little overextended on the high side. In other words, “tornado watch” conditions are present, and those who are fans of this indicator may suspect a downward move may not be too far off. In the opposite scenario, the RSI line falls below 30 and this indicator considers the stock to be “oversold.”

The most significant use of RSI is when the indicator’s trend is not moving in the same direction as the stock price. This is called a divergence and some investors see this as indication that the stock’s trend may be weakening.

Take a look at the recent example of the S&P 500 (SPX) in Figure 1. Around March 19, 2012, the RSI line peaked above 70 (that’s considered overbought by this particular indicator), which was followed by a lower peak on March 26. At the same time the price of SPX was making higher peaks, so it was diverging from the RSI. This is like the tornado watch: conditions may be building for a potential change.

FIGURE 1: RELATIVE STRENGTH INDEX (RSI) Looking to enter or exit a long-term stock position? RSI is one indicator that might help you answer the question “When?” by assessing the strength of the trend. Source: Penson Worldwide, Inc. For illustrative purposes only. Past performance is not a guarantee of future results.

How Traders Use It

All technical indicators have their admirers and detractors; here is how fans of RSI see it. If your portfolio closely tracks the performance of a major index like the S&P 500, they look for a break above or below the index’s trend line following the RSI’s divergence. In Figure 1, SPX’s break of support came about one week after the divergence was spotted. In the case of a break below support, traders might think about protecting their portfolio. Some wait to create bearish positions anticipating a trend change as early as the first lower peak on the RSI; others may wait for the index to break below a further support level.

Sometimes trading can seem like trying to tame a tornado, but many traders like to watch an indicator like RSI, to help them consider when a watch might turn into a warning.

Call Us

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

While this article discusses technical analysis, other approaches, including fundamental analysis, may assert very different views.

TD Ameritrade does not make recommendations or determine the suitability of any security, strategy or course of action, for you through your use of trading tools or technical trading indicators. Any investment decision you make in your self-directed account is solely your responsibility.

Investools, Inc. and TD Ameritrade, Inc., are separate but affiliated companies and are not responsible for each other’s services or policies. Investools does not provide financial advice and is not in the business of transacting trades.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2024 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top