INDICATOR EXPLAINER · #03
SPY 14-day RSI — momentum, stretched or exhausted
RSI (Relative Strength Index) measures how strong recent price momentum has been. It's simple, universally-watched, and has a signature caveat every trader learns: markets can stay overbought or oversold for a long time.
Today's reading
Same number you'll see on this component's card on the main dashboard.
What is the 14-day RSI?
The RSI is a 0–100 momentum oscillator invented by J. Welles Wilder in 1978. It compares the size of recent gains to the size of recent losses over a lookback window (BATS uses the classic 14-day period on SPY).
Formula intuition: If almost every day of the last 14 was up, the RSI will be near 100. If almost every day was down, it'll be near 0. Fifty is neutral.
Universally-watched thresholds
- Below 20 Extremely oversold — strong contrarian bullish setup
- Below 30 Oversold — sold off hard, potential bounce
- 30 – 45 Weakening momentum
- 45 – 55 Neutral / balanced
- 55 – 70 Rising momentum, healthy
- Above 70 Overbought — rally is stretched
- Above 80 Extremely overbought — bearish setup, but can persist
The famous RSI caveat: markets can stay overbought or oversold for weeks or even months. RSI tells you the odds have shifted — not when they'll pay off.
How BATS uses RSI
RSI moves in the same direction as market state: low RSI = oversold market, high RSI = overbought market. So BATS maps it straight through — low RSI drops the BATS toward the Very Oversold end (buy signal), high RSI pushes it toward Extended (careful).
| RSI range | BATS points | Bucket |
|---|---|---|
| Below 15 | 5 | Extremely Oversold |
| 15 – 30 | 5 – 25 | Oversold |
| 30 – 50 | 25 – 50 | Slightly Bearish → Neutral |
| 50 – 70 | 50 – 75 | Neutral → Bullish |
| 70 – 85 | 75 – 95 | Bullish → Extended |
| Above 85 | 95 | Extended |
Does it work? — Historical backtest (2003–2026)
For every trading day since RSP's 2003 inception (matched to VIX/Breadth backtest window), we compute the SPY 14-day RSI and measure how the S&P 500 actually performed 6 and 12 months later.
What the data actually says
Three findings jump out of the 23-year RSI backtest:
Extreme oversold RSI is powerful — but rare.
When RSI dropped below 15 (only 11 days in 23 years), the S&P 500 was up +24.6% on average 12 months later, and positive 100% of the time — every single instance.
Takeaway: When the crowd panics badly enough to push RSI below 15, history says the odds are extraordinary. It just doesn't happen often.
Extreme overbought RSI weakens forward returns.
When RSI pushed above 85 (35 days), forward 12-month returns dropped to +7.1% with only a 62% hit rate — noticeably worse than baseline (+10%, 82% hit). This is a signal neither VIX nor Breadth captured.
Takeaway: Extreme overbought is a genuine warning — not "sell everything," but "risk/reward here is worse than usual."
The middle is noise.
When RSI sat between 30 and 70 (the vast majority of days), forward returns matched the baseline of ~+10% at 12mo. Nothing to see.
Takeaway: RSI is a specialist. It fires at extremes and stays quiet in the middle. That's fine — it's designed to complement the other components.
How to use this information
RSI is famous both for how simple it is and for how easy it is to misread. Here's how the BATS interpretation stays balanced:
- Respect the caveat: markets can stay stretched. RSI over 70 doesn't mean a top today — strong rallies can keep RSI overbought for weeks or months. RSI under 30 doesn't mean the bottom is in today, either. It just shifts the odds.
- Extremes matter, middle doesn't. Focus on RSI when it's below 20 or above 80. The middle is baseline noise for forward returns and shouldn't drive decisions.
- Use it to confirm, not to lead. RSI's biggest value in the BATS is confirming other indicators. When RSI is oversold and VIX is spiking, that's a much stronger signal than either alone.
- The overbought warning is unique. Neither VIX nor Breadth flags "extreme overbought is bearish for forward returns." RSI catches it. That's why it's in the blend even at just 20% weight.
- Rare signals earn their keep at rare moments. Extreme RSI readings happen a few times per decade. That's not a bug — that's a feature. When they fire, listen.
Reminder: None of this is investment advice. Historical patterns are not guarantees. Always do your own research or talk to a financial professional before investing.