The hypothesis that a double top pattern in the daily RSI
(Relative Strength Index) above 70 often leads to a near-term
pullback has some support in technical analysis literature. Several
sources provide insight into the behavior of RSI in overbought
conditions and its implications for potential pullbacks.
RSI Overbought Conditions: When the RSI exceeds
70, it indicates that an asset is overbought, suggesting that a
pullback may be imminent. Historical data shows that selling
signals triggered when the RSI crosses below 70 after being above
this level often correlate with short-term price declines (
Quantified Strategies) (
TradingSim).
Double Top Pattern in RSI: The double top pattern
in RSI, where the RSI hits above 70 twice before pulling back, is
considered a bearish signal. This pattern indicates that momentum
is weakening, even though the price may be reaching new highs. It
often precedes a price reversal or pullback (
Quantified Strategies) (
Quantified Strategies).
Backtesting Results: Backtesting of RSI-based
strategies generally shows that signals from overbought conditions
(RSI > 70) can be profitable. For example, a study of the
S&P 500 using a range-momentum trading strategy based on RSI
showed that while such strategies do not generate frequent signals,
the ones they do produce are often profitable. This implies that
overbought conditions, particularly with confirming patterns like a
double top, can indeed lead to significant pullbacks (
Quantified Strategies).
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
AI The hypothesis that a double
Can Matt or Steve weigh in on this? I ...
Posted by steveo on 17th of May 2024 at 06:17 pm
AI
The hypothesis that a double top pattern in the daily RSI (Relative Strength Index) above 70 often leads to a near-term pullback has some support in technical analysis literature. Several sources provide insight into the behavior of RSI in overbought conditions and its implications for potential pullbacks.
RSI Overbought Conditions: When the RSI exceeds 70, it indicates that an asset is overbought, suggesting that a pullback may be imminent. Historical data shows that selling signals triggered when the RSI crosses below 70 after being above this level often correlate with short-term price declines ( Quantified Strategies) ( TradingSim).
Double Top Pattern in RSI: The double top pattern in RSI, where the RSI hits above 70 twice before pulling back, is considered a bearish signal. This pattern indicates that momentum is weakening, even though the price may be reaching new highs. It often precedes a price reversal or pullback ( Quantified Strategies) ( Quantified Strategies).
Backtesting Results: Backtesting of RSI-based strategies generally shows that signals from overbought conditions (RSI > 70) can be profitable. For example, a study of the S&P 500 using a range-momentum trading strategy based on RSI showed that while such strategies do not generate frequent signals, the ones they do produce are often profitable. This implies that overbought conditions, particularly with confirming patterns like a double top, can indeed lead to significant pullbacks ( Quantified Strategies).