Does an overbought Monthly RSI(14) value precede short-term weakness?

Whilst browsing twitter during the holidays I noticed that some analysts had suggested that $NVDA was going to correct because the monthly RSI(14) had crossed above 95.

Seeing that I am long $NVDA, I was curious enough to check whether such a high monthly RSI value might serve well as a short-term sell signal.

The first thing that I did was to check the one month performance of $NVDA following a monthly RSI(14) cross above 95.

However, I quickly discovered that this is the first time that the signal has been found in this stock. So at least as far as $NVDA goes, there is no historical evidence to suggest that a monthly RSI value crossing above 95 should act as a sell signal.

For the next set of results I tested the strategy on the historical constituents watchlist of S&P500 stocks. Test period 01/01/1999 – 30/11/16.

The precise strategy rules were as follows:

  • If monthly RSI(14) crosses above 95, BUY next month open.
  • SELL at close of month.

Perhaps surprisingly, even when analysing hundreds of stocks during a 15+ year sample period there were only 5 signals found.

The open to close performance during the month which followed the overbought signal are shown in the table below:

Whilst it is worth recognising that you would have made more money from buying stocks with a monthly RSI(14) crossing above 95 than you would selling them… 5 trades is not nearly enough of a sample to make any valid conclusions.

Finally, because the RSI(14) is usually considered overbought if it’s value rises above 70 I changed the rules of the strategy to:

  • If monthly RSI(14) crosses above 70, BUY next month open.
  • SELL at close of month.

The average performance metrics of the above strategy are shown below:

  • Trades = 3400
  • Average P/L% per trade = 0.69%
  • % of winners = 55.85%
  • Profit factor = 1.33

Contrary to what many analysts on Twitter might have you believe, the above results show that an overbought monthly RSI(14) signal does not tend to precede a falling stock price.

Just so we’re clear, that’s not to say that $NVDA isn’t going to fall in January…it might well do. But it is to say that if $NVDA does fall, the elevated monthly RSI(14) value will have had little to do with it.

2 Comments

  • Paul

    Reply Reply January 4, 2017

    they have to fill airtime somehow and sell those terminal licenses!

    Happy new Year!

  • Dan

    Reply Reply January 26, 2017

    I find that RSI >70 is often a sign of a strong trend. Too many people blindly buy/sell on RSI overbought/oversold signals based on outdated maxims. Good piece Llewelyn!

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