🚨 RSI on $AAPL stock is “overbought”! 🚨
An initial gut reaction to that statement, if you are not familiar with RSI or the conclusion to this article, might be:
- If I own $AAPL stock, maybe it is time to sell before the others start taking profit.
- If I don’t own $AAPL stock, I should not buy and wait for price to drop.
According to Investopedia, “overbought” is a “term used when a security is believed to be trading at a level above its intrinsic or fair value” and that it “may be a good candidate for sale”. (1)
Is that true when applied to RSI? Let’s find out.
RSI measures the power behind price movements over a recent period. You can learn more about what RSI is and how to use it in the blog post, RSI 101. (2)
With the power of the Candleverse we can use history to learn more about whether RSI “overbought” is aligned with its definition. For the purposes of this study, we will be using the variables as they were intended by its creator, which is a length of 14, any value over 70 as “overbought”, and any value between 30-70 as “regular”.
$AAPL
Let’s start with $AAPL, the creator of the iPhone. At the time of this study it is the largest publicly traded company with a 2.2 trillion dollar market cap. I like that as our starting point.
In Candleverse, I’ve run a 1 year backtest on the 1 day interval for $AAPL with RSI as our indicator. Below is a screenshot of the results in “table view”.
| Candle type | MACD | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | MACD Overbought | Occurrences 28 | 1 candle later -0.02% | 5 candles later 0.95% | 10 candles later 2.33% |
Candle type C3 | MACD Regular | Occurrences 211 | 1 candle later 0.04% | 5 candles later 0.02% | 10 candles later 0.16% |
Table view description: $AAPL recorded an “overbought” RSI candle value 28 times in the last year. In the candle after recording an “overbought” value, price moved on average (-0.02%). After 5 candles, price moved an average of (0.95%) higher and after 10 candles, (2.33%) higher. One can conclude from this that buying when an “overbought” candle value occurred and selling 10 candles later would have been a highly profitable trading strategy as you would have made on average a (2.33%) return.
Table view analysis:
When we compare “overbought” to the results of a “regular” RSI value we discover that on average after 5 candles price moved up in both cases but an “overbought” value resulted in a much higher return (0.95%) vs (0.02%).
Let’s expand to results from the last 5 years and see if they have been consistent.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 205 | 1 candle later 0.14% | 5 candles later 1.1% | 10 candles later 2.04% |
Candle type C3 | RSI Regular | Occurrences 1007 | 1 candle later 0.08% | 5 candles later 0.44% | 10 candles later 1.08% |
Table view analysis:
The results show that our occurrences of an “overbought” RSI jumped from 28 to 205 and our return after 5 candles was very similar at (1.1%). History may enjoy repeating itself. It appears that the difference in return between “regular” and “overbought” decreased, but our conclusion stays the same as “overbought” is still higher, (1.1%) vs (0.44%).
Now, let’s try 20 years!
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 878 | 1 candle later 0.21% | 5 candles later 1.04% | 10 candles later 2.09% |
Candle type C3 | RSI Regular | Occurrences 3997 | 1 candle later 0.11% | 5 candles later 0.64% | 10 candles later 1.34% |
Table view analysis:
History is impressive. While our occurrences of “overbought” increased from 205 to 878, the % change after 5 candles only changed (0.06%) and after 10 candles only (0.05%). To check out what would happen if you had been buying and selling an “overbought” RSI candle on $AAPL over the last 20 years, check out this blog post, [future link here]. (3)
$AAPL Conclusion
Now that we have looked at the last 1 year, 5 years, and 20 years I think we can create a baseline conclusion for what it means when an “overbought” RSI candle appears. It means that price moves twice as much as it does after a “regular” RSI candle. We can also conclude that “overbought” RSI means price will continue to increase, not decrease as our initial reaction suggested
Is $AAPL an outlier?
Let’s pick a comparable company in size and one that can’t seem to avoid the news, $TSLA.
$TSLA
Tesla, powered by Elon Musk and solar panels, is the 5th largest company ranked by market cap at the moment with a market cap almost half of $AAPL’s at 1.2 trillion dollars. Wow, $AAPL is doing well. Let’s look at the last 20 years of $TSLA RSI data.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 397 | 1 candle later 0.54% | 5 candles later 2.7% | 10 candles later 5.07% |
Candle type C3 | RSI Regular | Occurrences 2490 | 1 candle later 0.16% | 5 candles later 0.81% | 10 candles later 1.78% |
Table view analysis:
16% of the time $TSLA closed an “overbought” candle and wow, over 3x the amount of buying in an “overbought” market! So, our results for $TSLA are in alignment with our findings from $AAPL.
What about non-technology companies?
How about we switch away from tech related companies, to a retail giant, $SBUX, and an aerospace giant, $BA.
$SBUX
Coming in at a 136 billion dollar market cap, it is slightly lower than our previous tests as it’s listed as the 64th largest ranked by market cap. Let’s look at the last 20 years of their RSI data.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 467 | 1 candle later -0.1% | 5 candles later 0.26% | 10 candles later 0.82% |
Candle type C3 | RSI Regular | Occurrences 4364 | 1 candle later 0.07% | 5 candles later 0.3% | 10 candles later 0.61% |
Table view analysis:
Much less of a noticeable difference when we look 10 candles later. But, at 5 candles later we can see that price increased more in a “regular” market, but both types still returned a positive gain.
$BA
Boeing has a 122 billion dollar market cap. Let’s see what 20 years of data shows us.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 473 | 1 candle later 0.16% | 5 candles later 0.33% | 10 candles later 0.45% |
Candle type C3 | RSI Regular | Occurrences 4359 | 1 candle later 0.02% | 5 candles later 0.2% | 10 candles later 0.46% |
Table view analysis:
This is great that we are getting some different results to analyze. Boeing is showing that price still goes up after an “overbought” RSI candle value, but the increase compared to a “regular RSI candle value is very small, only a (0.12%) difference after 5 candles.
What about other asset classes like crypto?
Let’s see if this trend translates to crypto and check out Bitcoin and Ethereum, currently the two most well known.
$BTC
Bitcoin was launched in 2009 and is the largest cryptocurrency with a market cap as of this writing of 556 billion dollars.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 232 | 1 candle later 0.76% | 5 candles later 4.02% | 10 candles later 7.27% |
Candle type C3 | RSI Regular | Occurrences 1399 | 1 candle later 0.07% | 5 candles later 0.43% | 10 candles later 1.16% |
Table view analysis:
Yes, price increased and with a much larger difference than even $TSLA was. (0.43%) 5 candles after a “regular” RSI candle value and (4.02%) after an “overbought” candle value.
$ETH
Ethereum was launched in 2015 and as of writing has a market cap of 217 billion dollars, about half the size of Bitcoin.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 201 | 1 candle later 0.59% | 5 candles later 2.32% | 10 candles later 2.87% |
Candle type C3 | RSI Regular | Occurrences 1416 | 1 candle later 0.23% | 5 candles later 1.25% | 10 candles later 2.7% |
Table view analysis:
Ethereum is a little more in line with the stock market tickers. Still up and still higher.
Similar to stocks, do smaller market cap cryptos respond the same?
Let’s take a peek at some smaller market cap cryptos, like $ATOM and $ALGO over the past 5 years.
$ATOM
ATOM was launched in 2019 and as of writing has a market cap of 2.7 billion dollars. Significantly smaller than Bitcoin and Ethereum and our other stocks we’ve looked at. This should give us some good insight.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 67 | 1 candle later 0.1% | 5 candles later 3.47% | 10 candles later 5.81% |
Candle type C3 | RSI Regular | Occurrences 1011 | 1 candle later 0.34% | 5 candles later 1.32% | 10 candles later 2.69% |
Table view analysis:
In line with previous results. An average of (3.47%) 5 candles after an “overbought” RSI candle vs only (1.32%) after a “regular” RSI candle.
$ALGO
ALGO was launched in 2019. Its market cap as of writing was listed at 2.5 billion dollars.
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 55 | 1 candle later 1.02% | 5 candles later 7.41% | 10 candles later 7.92% |
Candle type C3 | RSI Regular | Occurrences 927 | 1 candle later 0.12% | 5 candles later 0.46% | 10 candles later 1.61% |
Table view analysis:
In line with $ATOM, we have an average of (7.41%) after “overbought” vs only (0.46%) after a “regular” candle.
What about early volatility if both $OMG and $ALGO both launched within the last 3 years?
In the first 2 years of launch, $ATOM saw its price decrease about ~-52% and then finish ~472% higher from where it started and $ALGO saw its price increase about ~35% before finishing ~-64%. Let’s ignore those volatile fluctuations and look at more recent activity, the last 1 year.
$ATOM
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 16 | 1 candle later -1.26% | 5 candles later 2.84% | 10 candles later 10.35% |
Candle type C3 | RSI Regular | Occurrences 321 | 1 candle later 0.29% | 5 candles later 0.83% | 10 candles later 2.02% |
Table view analysis:
While we do find that 1 candle later price dropped, the 5 candle later column that we have been comparing is consistent with our previous findings as price increased (2.84%) after an “overbought” candle vs (0.83%) after a “regular” candle.
$ALGO
| Candle type | RSI | Occurrences | 1 candle later | 5 candles later | 10 candles later |
|---|---|---|---|---|---|
Candle type C1 | RSI Overbought | Occurrences 11 | 1 candle later -1.55% | 5 candles later 2.96% | 10 candles later 1.25% |
Candle type C3 | RSI Regular | Occurrences 332 | 1 candle later -0.04% | 5 candles later -0.62% | 10 candles later -0.94% |
Table view analysis:
I rest my case, while the “overbought” result is slightly lower (2.96%), the “regular” result is actually negative at (-0.62%).
Conclusion
We looked at the largest companies in the world, the largest cryptos, and smaller cryptos across the last year, 5 years, and 20 years. Our summarized results when we just look at 5 candles later are:
From these results we can conclude:
- Price increases in the 5 candles following an “overbought” RSI candle an average of (1.06%) for stocks and (3.84%) for crypto.
- Price increases in the 5 candles after an “overbought” RSI candle (0.66%) more than after a “regular” RSI candle for stocks and (3.23%) more for crypto.
At the beginning, there were two supposed options when one would hear RSI is “overbought”.
A. If I own $AAPL stock, maybe it is time to sell before the others start taking profit. FALSE
or
B. If I don’t own $AAPL stock, I should not buy and wait for price to drop. FALSE
Based on the past we can conclude that these two options are not the best decisions you can make and are FALSE!
Instead you should decide to:
A. If you own $AAPL stock, you should hold. TRUE
or
B. If you don’t own $AAPL stock, you should buy. TRUE
Therefore, we have learned that when a ticker is in an RSI “overbought” market, the price increases and at a higher rate compared to a “regular” market and you should be looking at opportunities to buy as opposed to sell.
This conclusion held true when we looked at the largest companies in the world, the largest cryptos, and smaller cryptos across the last year, 5 years, and 20 years showing us that it’s not just an occurrence tied to one asset, one asset class, or one time period.
It is also important to note that technical analysis is not perfect and indicators should always be used in conjunction with others to determine a better market view.
Using them successfully takes time and practice.
Sources:
(1) - Investopedia, https://www.investopedia.com/terms/o/overbought.asp
(2) - Candleverse, RSI 101: What is RSI?
(3) - Candleverse,