📊 Charts & Technical Analysis · Lesson 7 of 9 · 9 min
Momentum: RSI & MACD
⚡ Ever see a stock so overhyped you think 'this literally cannot keep going'? Momentum indicators put a number on that gut feeling — and warn you when the party's about to run out of punch.
💡 Key idea
RSI > 70 = overbought, < 30 = oversold. MACD crossovers hint at momentum shifts. Clues, not commands.
🧠 Why it matters
Momentum indicators measure the SPEED of price moves. The RSI (Relative Strength Index) runs 0–100: above 70 is often 'OVERBOUGHT' (may be due for a pullback), below 30 is 'OVERSOLD' (may be due for a bounce). The MACD tracks the relationship between two moving averages; when its lines cross, it can signal momentum shifting. These are clues, not commands — an overbought stock can stay overbought a long time in a strong trend.
🌍 In the real world
💡 Rookie mistake: shorting a stock just because RSI hit 80 ('it MUST drop!'). In a raging bull run, RSI can pin near 80 for weeks while price keeps climbing. Indicators describe momentum — they don't override a powerful trend.
📌 Takeaways
- RSI over 70 = overbought; under 30 = oversold
- MACD crossovers signal momentum shifts
- Indicators are clues — they don't beat a strong trend
✅ Test yourself
An RSI above 70 typically signals...
- Oversold
- Overbought (possibly due for a pullback)
- No information
- A guaranteed crash
Answer: B · Overbought (possibly due for a pullback)
Above 70 is 'overbought' — the move may be stretched, though not guaranteed to reverse.
What do momentum indicators measure?
- The company's profit
- The speed/strength of price moves
- The dividend
- The number of shares
Answer: B · The speed/strength of price moves
They gauge how fast and forcefully price is moving.
Why is shorting just because RSI hit 80 risky?
- RSI is illegal
- In a strong trend, RSI can stay overbought a long time
- RSI only works on bonds
- It always works
Answer: B · In a strong trend, RSI can stay overbought a long time
Overbought can persist for weeks in a powerful uptrend — the indicator doesn't override the trend.
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