Stocks with RSI above 70, based on our research

Published February 21, 2019

RSI or the Relative Strength Index is a familiar term and the most popular indicator used so far in the field of technical analysis. This is a momentum indicator that shows how a stock has performed relative to its own price over a certain period. The indicator value moves between 0 and 100.

Theory suggests: that a stock is overbought when RSI is over 70 and oversold when the RSI value is below 30. Hence one must sell the stock if RSI crosses over 70 as it shows that the buyers are overwhelming the stock price and a correction is inevitable. Just the opposite thought is suggested when RSI is below 30. But is this really true in the real trading scenario? Should one sell the stock if its RSI is above 70 and buy if RSI is below 30?

Research suggests: To answer this question we did an algorithm based research. The report is based on 12 years of data from the National Stock Exchange in India which shows that stocks with high RSI, above the critical 70 level, have continued to rise. Similarly stocks with low RSI, below the critical 30 level, have continued to underperform vs benchmark.

We have studied 31,220 cases where RSI21 crossed above the 70 limit and 23,404 cases where RSI21 fell below the 30 limit. We called this strategy RSI momentum and called it a buy signal when RSI went above 70 and a sell signal when RSI fell below 30, quite the opposite of what the theory suggests.

The chart shows price development the first 66 days after RSI momentum signals compared to benchmark development in the period. Blue line is buy signals, red line is sell signals and black is benchmark index.

The table below shows annualized excess return following RSI momentum signals. The figures are based on the quarterly figures, i.e. excess return 66 days (3 months) after the signal was triggered.

%p: percentage points

The results indicate that RSI is a well-suited momentum indicator and that investments based on buy signals from RSI momentum give statistically stronger return than average benchmark.

Investtech offers a number of stock picking tools, and using Stock selection you can set criteria for RSI, allowing you to find for instance all stocks with RSI above 70. You can also set criteria for liquidity and volatility.

Complete report available here.

On our stock selection criteria, NSE stocks only, we set liquidity parameter to be 50 million rupees or above and RSI above 70. Interestingly, only 6 stocks came up on the list in the medium term, presumably because the market has been more in a sideways trend lately and many stocks have fallen after making temporary highs. Here we publish analyses for only three stocks, but you can experiment with the Stock selection tool and find out what stocks you get and if they offer good trading opportunities.

Wipro Limited (WIPRO.NS) Close: 372.20

HCL Technologies Limit (HCLTECH.NS) Close: 1057.95

MphasiS Limited (MPHASIS.NS) Close: 1041.25

We published an analysis of MPHASIS on 08.02.2019. The bigger picture has not changed much, apart from the fact that price has gone up from 1022.95 to 1041.25.