Friday, October 10, 2008

Oops, I Did it Again: RSI Hits 30

The historic RSI (which has only gone below 30 on 3 previous occasions: 1929, 1973, and 2002) suggests we have hit the bottom.

WTF's the RSI?'s a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 - (100/1+RS)
(where RS = Average of x days' up closes / Average of x days' down closes)

The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.