RSI & MACD INDICATORS
Plain English
RSI measures how overbought or oversold a stock is on a scale of 0–100. Above 70 = overbought (might pull back). Below 30 = oversold (might bounce). MACD measures momentum by comparing two moving averages — when the lines cross, it signals a shift in trend.
Going deeper
The Relative Strength Index (RSI), developed by J. Welles Wilder, measures the speed and magnitude of price changes over 14 periods. RSI ranges from 0-100. Values above 70 indicate overbought conditions; below 30 indicate oversold. RSI divergence (price makes a new high but RSI doesn't) is a powerful warning signal. The Moving Average Convergence Divergence (MACD) consists of: MACD Line (12-day EMA minus 26-day EMA), Signal Line (9-day EMA of MACD), and Histogram (distance between MACD and Signal). A bullish crossover (MACD crosses above Signal Line) signals upward momentum. A bearish crossover signals downward momentum. Both indicators work best combined with price and volume analysis, not in isolation.
Examples
RSI Oversold Bounce
During a market correction, quality stocks often see RSI drop to 25-30 (oversold). In 2022, when RSI on SPY hit 28, it marked the short-term bottom before a significant bounce. Oversold doesn't mean 'buy now' — it means 'be alert for a reversal signal.'
MACD Bullish Crossover
After a downtrend, the MACD line crosses above the Signal Line while both are below zero (undervalued territory). Historically, this configuration — MACD bullish cross below zero — has been one of the more reliable entry signals for swing traders.