Volatility vs Strength of Trend: A Duration-Based Analysis of RSI in Malaysian Stocks

This study investigates the dependability of the RSI by analyzing the duration of overbought or oversold zones, focusing on market trends perspective. Market trends were determined by strength (strong vs weak, via Average Directional Index (ADX)) and direction (uptrend vs downtrend, via Moving Average 50/Moving Average 200 (MA50/MA200) crossovers). Using daily data from the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) and ten Malaysian stocks (grouped into high and low volatility groups), the analysis covers a timeframe of 10-year period from 2015 to 2024. As a result, it is uncovered that Relative Strength Index (RSI) tends to remain in extreme zones for longer periods during strong trends, exhibiting similar persistence patterns for both high- and low-volatility stocks. An interesting discovery is contradictory RSI signals, such as oversold conditions during strong uptrends and overbought conditions during strong downtrends, raising concerns on potential false reversals. In contrast, weak trends were associated with significantly shorter RSI durations, supporting the idea that market momentum plays a central role in shaping RSI behavior. These findings challenge the conventional use of RSI as a reversal signal and suggest that its interpretation should be complemented with other indicators.