Hey Trader,
A stock that won’t stop climbing is hard to ignore. Every green day makes it look safer to own.
You watch it run for two weeks. Then you finally buy when RSI hits 80, right near the top.
I have watched this play out for 39 years. On the runs I’m tracking now, the institutions are getting out.
They’ll leave retail traders sucking on lemons when the stock cycles back down. Make one wrong turn up there, and $14 a share can be gone.
One number warns you before that happens. It’s the Relative Strength Index, or RSI.
RSI measures how stretched a stock’s recent run has gotten. It runs on a scale from 0 to 100.
Once it pushes toward 80, buying is statistically stupid. If you worked for me and bought up there, I’d fire you.
When RSI hits 80, I stop buying. On my own winners, it’s my cue to cash in.
I sold two big positions on Friday on readings just like that. I’d bought one of them at 56.
I sold all 400 shares at $64 with RSI sitting at 81.
Let me show you what’s really happening when RSI hits 80. Then I’ll walk you through how I act on it.
Pull up that stock you’ve been itching to buy. Check it against what follows before you click the button.
What Happens When RSI Hits 80
I’ve been a technician since 1992. I’m also a Chartered Market Technician, or CMT.
When RSI hits 80, I call buying statistically stupid. Anyone buying up there is getting gamma squeezed to death.
In a gamma squeeze, options hedging forces buying that drives the price higher. On the charts I’m watching, there aren’t a lot of real buyers behind it.
Everything in my model cycles. If a stock runs up to 88, it’s going to cycle down to 20.
I’m tracking 300 stocks that look just like this. When RSI hits 80 across that many charts, I see a statistical top.
Why Buying An Overbought Stock Costs You
The whole idea is to buy low and sell high. Buying when RSI hits 80 turns that rule on its head.
Up there, the risk-reward is awful. One wrong turn, and you’ve lost $14.
If you worked for me, I’d make you explain your logic. You’d have to tell me why you bought it here instead of lower.
You’d have no excuse.
Moderna shows you how fast it can go wrong. Its daily RSI was sitting around 78.
All it takes is one AP wire note saying a drug wasn’t approved. That note could gap the stock down at the open.
If you can’t manage risk, you’ll never survive this business.
None of this means you can’t buy strength. Buying a breakout at a level like 146 is fine with me.
If you buy when RSI hits 80, though, you need therapy.
How I Trade When RSI Hits 80
On Friday, I liquidated two big positions. One I’d held for a few months. I’d held the other for a couple of weeks.
I made the call off the four-hour chart. I had three reasons to sell:
- The RSI was approaching 80. That’s statistically stupid territory.
- Everything in my model cycles. A stock at these readings cycles all the way back down.
- The money kept coming out. As the stock climbed, the institutions were getting out.
Those three reasons got me out of the 400 shares I mentioned earlier. Shorting when RSI hits 80 takes more than the reading itself.
An RSI of 80 sets the condition. The trigger has to come from somewhere else.
When I short, the stock also has to be stupid expensive. One of those shorts made me $11 in about a week and a half.
It’s the quickest money I ever made.
I keep my risk defined, too. Don Kaufman has no problem with shorting, as long as you use a spread.
That’s how I operate. I trade low risk, high return.
When I’m wrong, I throw my hands up and admit I blew it. When I’m right, I’m really right.
Run This Check Before Your Next Buy
Pull up the four-hour chart on any stock you plan to buy. Then work through these three checks:
- Read the RSI first. If it’s pushing toward 80, take the buy off the table.
- Look at your own winners. When RSI hits 80 on a stock you own, take profits.
- Never short on RSI alone. You need a stupid expensive stock and a defined-risk trade.
I’m not trying to hit home runs. I just need a couple of singles every day.
Skipping the chases keeps those singles coming. Selling when RSI hits 80 locks them in.
I built the Genesis COG System around low-risk, high-return trades like these. It gives you the complete methodology behind exits like mine.
The Genesis Cog Scanner adds real-time signals on top. Together, they help you see when RSI hits 80 before you chase it.
Join the Genesis COG System Today
Professor Jeffrey Bierman
Creator of the Genesis COG System
