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Relative strength index (RSI) is a momentum indicator developed to compare the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a counter. It is primarily used to attempt to identify overbought or oversold conditions.
Traditionally, a RSI reading of 30 or below is commonly interpreted as indicating an oversold or undervalued condition that may signal a trend change or corrective price reversal to the upside.
Caution to be taken when applying this strategy:
1. Most of the stocks that are in prolonged downtrend can have RSI below 30 for an extended period. It is therefore required to check whether there are any buying signals generated, eg: bullish divergence. Bullish divergence occurs when stock price makes a lower low but the RSI does not. Support and trendlines should also be checked to determine whether it is the time to enter the market.