RSI Range Shift – The Key to Understanding the Market’s Behavior

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Description: Of all the technical analysis tools out there, the Relative Strength Index or RSI is perhaps the most widely used indicator amongst the technical trading fraternity worldwide.

Developed during the 1970’s by J. Welles Wilder, Jr., RSI is a very versatile momentum oscillator that helps to gauge the changes in price and momentum of a financial instrument over a certain period of time. Wilder suggested the use of 14 days (half lunar cycle) as the default setting for the indicator in his 1978 classic New Concepts in Technical Trading Systems.

Although the conventional approach of using the RSI indicator involves looking at overbought and oversold levels, divergences and failure swings, one of Wilder’s students named Andrew Cardwell aka ‘The RSI Guy’ fathomed deeper into the RSI indicator and discovered that it can be used for both trending and non-trending markets which was against the common wisdom that a banded momentum oscillator such as the RSI is only useful in non-trending or sideways market. Cardwell introduced powerful concepts like RSI Range Shifts and Positive and Negative Reversals that are pivotal to understanding the market’s behavior. Let’s have a look.

What is RSI Range Shift?

RSI Range Shift is a phenomenon observed in the RSI indicator that occurs when it ‘shifts’ from a predefined range to another pre-defined range in response to the price action of an underlying asset.

This occurrence often forebodes of a trend change that can help a trader to be on the right side of the market.

There are 5 types of RSI ranges. They are as follows:

  1. Bullish Range (40-80): When a stock is in an uptrend, it is observed that the RSI refrains from dipping into the conventional oversold level of 30. Rather, it oscillates between 40 on the downside and 80 on the upside. The inability of the oscillator to reach the default oversold level of 30 indicates that there is inherent strength in the underlying asset and hence any dip to the new found oversold level of 40 could be bought into.

In the daily chart of Adani Ports and Special Economic Zone Ltd., we can see how the RSI took support at 40 during uptrend.

  1. Super Bullish Range (60-80): When a stock is in a strong uptrend, it is seen that the RSI refrains from dipping below 60. It oscillates between 60 on the downside and 80 on the upside. The inability of the oscillator to go below 60 indicates that the stock is super bullish and exhibiting resilience to lower prices. Hence, any dip to the new oversold level of 60 could be bought into.

In the example given below, we can see how Indiabulls Housing Finance Ltd. took support at the RSI 60 level again and again during a strong uptrend.

  1. Bearish Range (20-60): When a stock is in a downtrend, it is observed that the RSI refrains from rising to the conventional overbought level of 70. Rather, it oscillates between 60 on the upside and 20 on the downside. The inability of the oscillator to reach the default overbought level of 70 indicates that there is inherent weakness in the underlying asset and hence any rally to the new found overbought level of 60 could be sold into.

In the example given below we can see how Aurobindo Pharma encountered resistance at the RSI 60 level during a downtrend.

  1. Super Bearish Range (20-40): When a stock is in a strong downtrend, it is seen that the RSI refrains from rising above 40. It oscillates between 40 on the upside and 20 on the downside. The inability of the oscillator to go above 40 indicates that the stock is super bearish and exhibiting resilience to higher prices. Hence, any rally to the new overbought level of 40 could be sold into.

In the daily chart of Dena Bank, we can see how the stock faced strong resistance at RSI 40 level during a strong downtrend.

  1. Sideways Range (40-60): When a stock is trading within a sideways range, RSI tends to oscillate between 40 on the downside and 60 on the upside. During this period, one can go long at 40 RSI with a target of 60 RSI. Conversely, one can go short at 60 RSI with a target of 40 RSI.

In the daily chart of Hindalco, we can see how the stock faced resistance at the RSI 60 level and took support at the RSI 40 level during a sideways market.

RSI Range Shift in Action!

In the daily chart of Tata Steel given below, we can see how the range of RSI ‘shifted’ from Bearish (20-60) to Sideways (40-60) to Bullish (40-80) which was in sync with the respective downtrend, sideways and uptrend moves in prices respectively.

Hence, we can see how a trader can utilize this knowledge of range shifts to improve his trading performance and take trades in tandem with the markets.

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Follow Abhijit Paul:
Abhijit prefers to define himself with the 3is – investor-trader, instructor and influencer. He has over 14 years of experience in the Indian Financial markets, and is currently, a SEBI Registered Research Analyst and an active trainer. He offers unparalleled services in both training and advisory.

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