Another trading technique examines RSI behavior when it is reemerging from overbought or oversold territory. This signal is called a bullish swing rejection and has four parts:

  1. The RSI falls into oversold territory.
  2. The RSI crosses back above 30.
  3. The RSI forms another dip without crossing back into oversold territory.
  4. The RSI then breaks its most recent high.

As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it bounced higher. Using the RSI in this way is very similar to drawing trend lines on a price chart.

There is a bearish version of the swing rejection signal that is a mirror image of the bullish version. A bearish swing rejection also has four parts:

  1. The RSI rises into overbought territory.
  2. The RSI crosses back below 70.
  3. The RSI forms another high without crossing back into overbought territory.
  4. The RSI then breaks its most recent low.

The following chart illustrates the bearish swing rejection signal. As with most trading techniques, this signal will be most reliable when it conforms to the prevailing long-term trend. Bearish signals during downward trends are less likely to generate false alarms.

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