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When I used to hold stock trading seminars, I used to always emphasize the importance of using RSI as profit taking opportunities and also taking short term counter trend trades.  Today was an example of a very strong bounce off extremely oversold RSI on the major indexes.  The charts you see below show the three major indexes and the low RSI levels are highlighted on the chart.

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The reading on the S&P 500 Index yesterday after the close was 10.4.  Look at the RSI line (purple) at the bottom of the chart and see how low it was.  When you see such pattern, you can expect a strong bounce that is triggered by the oversold condition which brings momentum traders, and speculators on board.  Of course, it also squeezes the short sellers late in the trading day and provides a great profit opportunity.  Once the S&P penetrated through the 7-day moving average (not displayed on above chart) for the first time in the last eleven trading days, it was off to the races, and the Index actually penetrated and closed above the 10-day moving average as well.

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The NASDAQ was a screaming buy at RSI of 5.11.  I don’t remember seeing it down that low in a long time.  Well, the NASDAQ definitely provided a good opportunity today for a trade on the long side.  Once the NASDAQ penetrated through the 7-day moving average (not displayed on above chart) , it was off to the races as well, and it closed just short of the 10-day moving average.

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The RSI reading on the Dow at 12.31.  Again, an extreme oversold level, and it too bounced off strongly, and just like the S&P 500, once it penetrated through the 7-day moving average (not displayed on above chart) it was off to the races, and the Index actually penetrated and closed above the 10-day moving average as well.

In conclusion, it is a good idea to take profit at extreme RSI levels, and it could be profitable to trade the momentum of the bounce.

Trade Smart!