Using RSI with Stocks at All Time Highs

Hey there! My name is Nate and I write for WOLF Financial. If you enjoy learning about trading, I guarantee you’ll also enjoy my content on 𝕏 @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

After an amazing week and markets making new all-time highs, many stocks have been doing exactly the same thing.

When a stock is making new highs there can be concern around how much higher it can go.

That’s right, instead of celebrating and expecting higher highs the tendency is to wonder if there will be a pull back.

With so many names making big moves higher, this kind of talk has been ramping up and I thought it might be helpful to outline a couple of tools to help you through the trade.

This week we will take a look at how the Relative Strength Index (RSI) can either keep you in the trade as it moves even higher, or give you reasons to exit.

There are three key things I like to look for:

1. Overbought Conditions

2. Divergences

3. Support between 40-50 RSI

In a bull market with stocks powering to new highs, paying attention to these three can help you with your decision making.

Let’s dive into each one.

Overbought Conditions

If the RSI for a given ticker is above 70, the stock is considered overbought.

This doesn't necessarily mean a price drop is imminent, but it's a signal to be cautious.

Stocks can remain overbought for extended periods, especially during strong uptrends.

Take a look at AMD and the recent run with its RSI well above 70 for nearly all of December.

You can see from the chart that after a brief cooling off, AMD resumed higher and now RSI is above 80 which tells me it could stay above 70 a little while longer.

Relative strength above 70 can be a signal that shares are overbought, and often a quick reversal follows.

If the reversal does not come quickly, and an elevated RSI holds up, you are looking at a stock that might push even higher.

Divergences

If the stock is making new highs but the RSI is not, this is known as bearish divergence and could indicate that the uptrend is losing strength.

This might be a signal that the stock’s price could soon fall.

If you think about it, it makes total sense.

A stock that is moving higher but is losing overall relative strength means it is underperforming despite it’s positive moves.

It is losing ground.

Eventually this will be noticed and money will be directed to other opportunities.

A recent example of bearish divergence can be found with SBUX.

After shares pushed higher in November without RSI also making higher highs, the bearish divergence, sellers stepped in and pushed the price much lower.

Keep an eye on RSI when stocks are making new highs. If it is making higher highs right along with the share price the trend could continue.

But if you spot the divergence, it is time to take profits.

RSI Support between 40-50

IWhen a stock is on a bull run, the RSI often stays above 40 and really the support you want to see hold up is at 50.

If RSI drops below these levels, it could be a sign that the uptrend you are trading is starting to weaken.

Take a look at ANET, which continues to maintain an RSI well above 50 even when it pulls back.

It is no surprise that shares of ANET continue to power higher.

Using RSI along with other indicators can help you make better, more informed trading decisions.

An informed trader is often a profitable one.

To recap, RSI can be used to monitor:

1. Overbought Conditions

2. Divergences

3. Support between 40-50 RSI

Have a great week of trading ahead and take some time to review the RSI of your favorite stocks!

-Nate

 @tradernatehere