RSI Explained — How to Use It for Cyclical Stocks

What Is RSI?

The Relative Strength Index (RSI) was developed by J. Welles Wilder and published in 1978. It measures the speed and magnitude of recent price changes to assess whether a stock is overbought or oversold — on a scale from 0 to 100.

The standard RSI uses 14 trading days (roughly 3 weeks). It compares the average size of up days to down days over this period. When up days have been consistently larger, RSI is high. When down days dominate, RSI is low.

The Key Levels

Why RSI Is Especially Powerful for Cyclical Stocks

Cyclical stocks experience extreme selling pressure at cycle troughs — far beyond what fundamentals justify. Investors panic, institutions reduce risk, and momentum traders pile on the short side. This systematic overselling pushes RSI to extreme lows that rarely occur in defensive or growth stocks.

When MPCC (MPC Container Ships) bottomed in March 2020 at NOK 2.05, the RSI had fallen below 15 — extreme oversold territory. This technical signal, combined with the fundamental signals (BDI depressed, P/B below 0.5x), created the conditions for the subsequent +1,434% cycle return.

Similarly, at cycle peaks, euphoric buying in cyclical stocks regularly pushes RSI above 80 — signalling that the rally is overextended and a reversal is statistically likely.

RSI Divergence — The Advanced Signal

RSI divergence is one of the most reliable signals in technical analysis. It occurs when the stock price makes a new high (or low) but the RSI does not confirm it:

• Bearish divergence: Stock makes a new high, but RSI makes a lower high. This suggests momentum is fading even as price rises — often an early warning of a cycle peak.
• Bullish divergence: Stock makes a new low, but RSI makes a higher low. This suggests selling pressure is exhausting — often an early signal that the trough is near.

Shipping stocks regularly show textbook RSI divergence at major cycle turns. Identifying it early — before the price confirms the turn — can meaningfully improve entry points.

How Signycle Uses RSI

In Signycle's combined signal model, RSI contributes to the technical confirmation score alongside the 200-day moving average and MACD. The full buy alert fires when:

• Fundamental score is high (BDI depressed, P/B low, order book contracted)
• RSI is in or recovering from oversold territory (below 35)
• Price is beginning to recover relative to the 200 DMA

This combined approach has historically produced fewer false positives than any single indicator alone.