RSI and momentum

"If you've got a two-hundred-horsepower motor, do you get two hundred horsepower out of it — your full potential — or do you get a hundred horsepower, or fifty horsepower?"

If you've got a two-hundred-horsepower motor, do you get two hundred horsepower out of it — your full potential — or do you get a hundred horsepower, or fifty horsepower?

RSI and momentum both measure price strength, but over different horizons: RSI looks at the last few weeks, momentum at the entire past year.

The Relative Strength Index oscillates between 0 and 100 by comparing the average size of gains and losses over roughly the last two weeks. Below 30, a stock is considered potentially oversold - it has dropped quickly and could bounce. Above 70 it's potentially overbought - it has risen quickly and could cool off. These are indicative thresholds, not automatic rules.

12-month price momentum instead measures how much the price has changed over the past year, as a percentage: positive if the price rose, negative if it fell. Strong momentum tends to persist in the short term, but a very high reading can also mean a stock has become expensive relative to a year ago - information that complements RSI, which looks at a few weeks rather than a full year.

Neither one tells you whether a drop or a rally actually reflects the company's fundamentals: they only say the price moved, not why. If the drop reflects a real problem - slowing revenue, rising debt - an oversold RSI can stay that way for a long time, or fall further. They make sense as timing confirmation on a stock the fundamentals have already flagged as interesting, not as a substitute for fundamental analysis.