Many traders think that an extreme overbought/oversold reading indicates a stock index top/bottom.
Very often espicially with a rising stock index, an extreme RSI reading implies continuation of the trend.
Note in late 2019 the persistant bull trend had a very overbought reading, yet the final top wasn't in place until a double bearish RSI divergence.
The same phenomenon happens in down trending stock indices - note the double bullish RSI divergence in 2020.
Bearish RSI divergences are less common with individual stocks because they have a greater chance for blowoff tops.
When looking for a stock index top be patient, wait for at least one RSI bearish divergence before selling.
Mark
Very often espicially with a rising stock index, an extreme RSI reading implies continuation of the trend.
Note in late 2019 the persistant bull trend had a very overbought reading, yet the final top wasn't in place until a double bearish RSI divergence.
The same phenomenon happens in down trending stock indices - note the double bullish RSI divergence in 2020.
Bearish RSI divergences are less common with individual stocks because they have a greater chance for blowoff tops.
When looking for a stock index top be patient, wait for at least one RSI bearish divergence before selling.
Mark
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