The Relative Strength Index has long occupied a central place in technical analysis. Yet, for many market participants, RSI remains confined to a simplistic overbought/oversold framework—an oscillator that flashes warnings at 70 and 30, prompting reflexive countertrend trades. The deeper traders dig into how markets work, they better understand that this interpretation is not only incomplete but often counterproductive in trending markets. The true analytical power of RSI lies in its structural behavior—its trends, ranges, reversals, and internal momentum shifts. This article explores how RSI reversals, can be systematically used to establish price targets within both trending and transitional market environments.
What Is An RSI Reversal
RSI reversals come in two ways: Positive and Negative. A positive RSI reversal comes when the indicator makes a lower low, while the price makes a higher low. In this case, the lower low of the indicator stays outside the oversold zone. Conversely, a negative RSI reversal comes when the indicator makes a higher high, while price makes a lower high. In this case, the higher high of the indicator remains outside the overbought zone.
The Rationale Behind The Concept Of RSI Reversals
Traditional RSI analysis assumes that readings above 70 are, by definition, bearish and readings below 30 are, by definition, bullish. According to a market technician we deeply appreciate, Constance Brown, this interpretation ignores an essential truth: RSI behaves differently in bull markets than in bear markets. In sustained uptrends, RSI typically oscillates between approximately 40 and 80. In sustained downtrends, it often ranges between 20 and 60. These shifting ranges redefine what constitutes “normal” momentum.
Once this structural understanding is understood, RSI reversals take on a far more meaningful role. An RSI reversal is not merely a turn from an extreme reading but rather a momentum shift point, within a defined range. These reversals often precede price pivots or accelerations because momentum typically shifts before price completes its move.
Let us consider a strong uptrend, in which RSI repeatedly bottoms near 40 and rallies toward 75 or higher. When the RSI reverses downward from the upper boundary of its bull range, the move does not necessarily signal a bear market. Instead, it frequently signals a corrective phase within the broader uptrend. Conversely, when RSI declines toward 40 and reverses upward, the momentum shift often marks the end of a pullback and the beginning of a renewed advance.
The key insight here is that these RSI turning points can be used to project price objectives. A defined movement in RSI frequently corresponds to a specific movement in price. When RSI reverses from an upper boundary toward its mid-range support, price commonly retraces to a structural support level. When RSI reverses upward from its lower boundary in a bull market, price frequently advances toward prior highs or measured extensions. This relationship allows traders to treat RSI as a forward projection tool rather than a reactive oscillator.
How RSI Reversals Are Translated Into Price Targets
Let us move forward with a real life example. The daily chart of UPS is listed below. As we can see, there’s a clear RSI positive reversal. The indicator makes lower lows, while price makes higher lows. So how do we get a price target from this set up?
Step 1: Define the prices that correspond to the three extremes of the indicator. In our example, the first low of the RSI (A) corresponds to a share price of 77.64, which we’ve named P1. The second (lower) low of the RSI (B) corresponds to a share price of 81.68, which we’ve named P2. Finally, the high of the RSI between these lows (C), corresponds to a share price of 88.32, which we’ve named P3.
Step 2: Subtract P1 from P3. In our example, we get 10.68.
Step 3. Add that number to P2 to arrive at a price target. In our example, we got a price target of 92.36. Indeed, just one month after, our price target was almost fulfilled (92.19)
Our real world case study was examined in isolation to demonstrate how RSI reversals work in real life. However, rarely should one rely on just a reversal to project their price target. Things to look for when projecting a price target using this method are supports and/or resistances, gaps, Fibonacci levels and trend lines. For example, suppose an equity index is advancing within a clearly defined uptrend and approaches a prior resistance area. If RSI simultaneously reaches the upper boundary of its bull range and reverses downward, the confluence of price resistance and momentum reversal provides a reasonable basis for projecting a corrective target. What we need to keep from this is that RSI reversals should be examined within the overall technical analysis context. In our example, the RSI reading on the weekly chart was bouncing of 40, a few weeks before the reversal, which increases the positive reversal’s price target success. (Read also: RSI: Top 5 mistakes of the novice trader)
Bottom Line
Projecting price targets with RSI is a very useful aspect of this indicator, although it is sometimes neglected. Using RSI solely as a countertrend indicator removes much of its usefulness. RSI reversals, when examined within the broader market context, can be of great value to the trader. Having said that, trying to exploit RSI reversals independent of the market structure is a recipe for substantial losses.
