how to identify overbought stocks with rsi
technical analysis has provided traders with increasingly sophisticated calculations to identify overbought stocks george lane s stochastic oscillator which he developed in the 1950s examines recent price movements to identify imminent changes in a stock s momentum and pricing trend this oscillator laid the foundation for the technical indicator which has become the primary indicator of an overbought stock the relative strength index rsi the rsi measures the power behind price movements over a recent period typically 14 days using the following formula rsi 1 0 0 1 0 0 1 rs text rsi 100 100 left 1 text rs right rsi 100 100 1 rs rs represents the ratio of average upward movement to downward movement over a specified period of time a high rsi generally above 70 signals traders that a stock may be overbought and that the market should correct with downward pressure in the near term many traders use pricing channels like bollinger bands to confirm the signal that the rsi generates on a chart bollinger bands lie one standard deviation above and below the exponential moving average of a stock s recent price analysts that identify a stock with a high rsi and a price that is edging toward the high end of its upper bollinger band will likely consider it to be overbought example of overbought conditions using rsihere s an example of a chart with a high rsi reading that suggests overbought conditions in the above chart the oversold rsi conditions below 30 predicted a rebound in the stock price in october the overbought rsi conditions above 70 in february could indicate that the stock will consolidate or move lower in the near term 