Failure swings - RSI

Wilder also talked about failure swings. Failure swings can be used as strong indicators of an impending reversal. Failure swings are not affected by price action. Failure swings are only concerned with the RSI for the signals, and you ignore any divergences between the RSI level and the security's price level. These failure swings are found at the overbought and oversold levels.

As an example, let's assume that the RSI reaches 77. This is clearly overbought territory. Now, in the next move the RSI pulls back to 71. This pull-back does not cross below the 70 or overbought level.

The next move finds the RSI going back up to 79. If the next move down the RSI makes does not cross 70, this is what Wilder called a failure swing above 70. Wilder said that failure swings above 70 or below 30 are strong indications of a market reversal. RSI levels can also help identify trends.

Others have taken Wilder's work and expanded on it. Andrew Cardwell has developed new interpretations of the RSI in order to determine and confirm an existing trend. Cardwell noticed that an up trend can generally be seen in the 40 and 80 level. A down trend occurred between the 60 and 20 level.