Trend Trading with Relative Strength Index (RSI) Support and Resistance Levels
Learn the different RSI support and resistance levels to watch for during uptrends and downtrends. Then, use these RSI support and resistance levels to help determine the strength of the current trend. When the RSI breaks these support and resistance levels it often indicates a trend reversal is occurring.
The Relative Strength Index (RSI) is a technical analysis indicator that oscillates between 0 and 100. When the RSI is moving up the price gains are outpacing price losses over the look-back period, and when the RSI is moving down the price losses are outpacing gains over the look-back period. The look-back period is how many many price bars the indicator uses to make its current calculation. The typical setting is 14, meaning the indicator will look at gains and losses over the prior 14 price bars. Traders can use any setting they wish, though. Each new price bar produces a new calculation based on the prior 14 price bars. Thus, the RSI forms a continuous line over time.
When we look at the how the RSI behaves during a trend, we often find that it moves within a defined area for an uptrend and a different defined area for a downtrend. A deviation from this tendency can signal a change in trend. These levels or areas, discussed below, may vary slightly by market or asset.
Trend Trading with RSI
The first thing we need to know is that the RSI moves within support and resistance channels during price trends. The levels the RSI ranges between indicates the strength of the trend and the trend direction.
For daily charts:
- In an uptrend, the RSI range should stay above 30, and often hit 70 or higher.
- In a downtrend, the RSI will generally stay below 70, and often hit 30 or lower.
This can let us know if a trend is reversing, as a drop below the 30 level on an RSI is rare in an uptrend. If the RSI drops below 30 during an uptrend, or fails to recover above 70, the uptrend could be in trouble.
These levels may vary slightly depending on the market or time frame you’re trading, so look at a historical chart of whatever you are trading to see the RSI levels that are important for the trends in that asset or that time frame (weekly charts, hourly charts, etc.).
In the chart above, 30 acts as a support level for the uptrend, while it was breached for a day or two on a number of occasions the RSI quickly bounced and moved back up to the 70+ level, confirming the uptrend was still in place.
Below is an example of how the RSI acts in a downtrend. Notice how the price is continually reaching below 30 on the RSI (often hitting 20), and doesn’t move above 70. Toward the right side of the chart, the RSI definitively breaks above 70 and reaches near 90. This ended up being a turning point for the stock as the price didn’t reach the April low again. The RSI also helps confirm the ensuing uptrend. The moves up on the RSI often hit 70 or higher and moves down stay above 30.
The next sign of trouble in the stock didn’t occur until years later. In mid-2015 the RSI drops below 30 and doesn’t recover back above 70. A several month downtrend ensues. The RSI then spikes above 70 in April. This marks a potential transition back into an uptrend. The RSI swiftly drops back below 30, though, so we don’t have confirmation that an uptrend has started yet. But, if we look at the price, notice it is barely making lower lows. The downtrend is losing steam, which is why the RSI was able to spike above 70. In August the RSI spikes above 70 again, and then manages to stay above 30 on the oscillations that follow. At this point, the price is also making higher swing highs and higher swing lows. The downtrend is over and the new uptrend is confirmed.
When the RSI moves above 70 and then quickly drops below 30 right after (or vice versa) you can be certain there are likely a lot of traders confused, because the price likely just had a big move up followed by a big move down. Such events often occur at trend transition points (uptrend to downtrend, or downtrend to uptrend) when emotions are high and prone to causing big swings in both directions.
The RSI bouncing between above 70 and below 30 could also signal the start of a big consolidation phase. We see this in the chart below. The RSI helped confirm both the uptrend and downtrend, but then notice how the up moves in the RSI become the same size as the downside RSI waves. The RSI is not showing a bias to toward higher levels or lower levels, it is just ranging…and so is the price. If the RSI is oscillating an equal distance (above and below) 50, chances are the price is in a range, and looking at the price will confirm that.
On the right of the chart above, the most recent move was above 70, and the RSI hasn’t dropped below 30. That favors an uptrend. A drop below 30 on the RSI would point toward a continued ranging environment or a downtrend. Also, whenever a big range or chart pattern develops, watch the price for a breakout or false breakout, as they also provide trading opportunities and analytical insight.
How This Can Actually Help With Your Trading
Trend trading with RSI support and resistance levels can help confirm trends and isolate when the market is shifting direction. That is all well and good, but it is not a crystal ball and doesn’t tell you when to enter and exit trades. For example, you wouldn’t want to trade off RSI support and resistance levels alone, even though just looking at the RSI levels can provide us with a good indication of when the trend is healthy and when it may be reversing.
Using the RSI in this way is only a trend confirmation tool. For example, assume you have a trend trading strategy that just gave you a buy signal. Since you are a trend trader, you want to only be buying if you have a healthy uptrend. Pull up a chart of the asset you are considering a trade in and look at the RSI levels. If the RSI is staying above 30 and routinely reaching above 70, that’s a positive sign for the uptrend. You will likely want to proceed with acting on the buy signal produced by your strategy. If the RSI is dipping below 30 and not reaching 70 that isn’t a strong uptrend. You will probably want to skip acting on that buy signal produced by your strategy.
Also, if an asset is in an uptrend but then the RSI drops below 30, or is in a downtrend and then rallies above 70, that could be the start of a reversal. These are opportunities that may benefit from a reversal strategy. We don’t take trades based on the RSI hitting these levels, but these changes in RSI levels can alert us to potential reversal opportunities. The RSI is letting us know a reversal may be taking shape. The next step is to watch the price action for an entry. To see what to watch for, read Strong Trend Reversal Strategy.
Don’t buy simply because the RSI is above 30 and regularly moving above 70. That just tells us the uptrend is likely in decent shape. We still need a strategy that tells us precisely when to get into trades, and when to get out. The same goes for shorting during a downtrend. These RSI support and resistance levels are just a confirmation tool, and not trade signals.
When the RSI is whipsawing between 70 and 30, or has equal oscillations on either side of 50, the price is likely in a big consolidation/ranging phase. In this case, trend trading strategies may not be as effective. Utilize range trading strategies, or look at the bigger picture and implement a front-running strategy. A front-running strategy takes advantage of the size of the range and the breakout that will inevitably occur down the road.
Final Word on Using RSI Support and Resistance Levels
I rarely use RSI support and resistance levels anymore. Indicators are just interpretations of price data, so often the price itself will tell you all you need to know about which direction to trade in, and when to step aside when the trend is unclear. That said, when I was learning how to read price action,I did find the RSI support and resistance levels useful. I still do refer to them on occasion.
The RSI may help some traders spot trends and reversals—just like they used to help me –and can be used as a confirmation tool. During an uptrend on the daily chart, the RSI of the asset should be staying above 30 and regularly moving above 70. When this is occurring, the uptrend is likely in decent shape and buy signals based on your strategies can be taken.
During a downtrend, the RSI will often move below 30 and stay below 70. When this is occurring, avoid long trades and consider taking short trades based on your strategies.
Watch for deviations to indicate trend changes. The RSI moving above 70 in a downtrend could signal a reversal into an uptrend, for example, especially if the RSI stays above 30 on the next wave down.
I have not found this RSI technique particularly useful for day trading. While it may confirm trends and reversals, intra-day trends don’t often last long enough for the indicator to be of much value.
On weekly charts, this confirmation method can be quite effective. Look at a historical chart of the asset to see which RSI levels are important for marking uptrends and downtrends.
By Cory Mitchell, CMT