How to arrange the monthly RSI bottom divergence + weekly line breaking through the volume + daily line stepping back on the gap?

Monthly RSI bottom divergence, weekly volume breakout, and daily gap retest together signal a high-probability bullish reversal with strong confluence.

Jul 26, 2025 at 12:47 am

Understanding RSI Bottom Divergence on a Monthly Basis

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. When analyzing monthly RSI bottom divergence, traders look for a scenario where the price makes a new low, but the RSI fails to confirm that low by forming a higher low. This signals weakening downward momentum and a potential reversal. To identify this pattern, ensure your charting platform supports monthly timeframes. Open a monthly candlestick chart and overlay the RSI indicator, typically set at 14 periods. Monitor for instances where the asset’s price drops to a fresh low, yet the RSI registers a less extreme value than during the previous low. This divergence suggests that selling pressure is diminishing, even if the price continues to fall.

When setting up alerts or manually scanning for this signal, focus on assets that have experienced prolonged downtrends. The more pronounced the divergence, the stronger the potential reversal signal. Confirm the divergence by drawing trendlines on both the price and RSI charts. A break above the downtrend line on the RSI can serve as early confirmation. It’s essential that the RSI remains below 30 during both lows to maintain the context of oversold conditions. This combination of oversold RSI and bullish divergence increases the reliability of the signal.

Analyzing Weekly Volume Breakouts

After identifying a potential reversal signal from the monthly RSI divergence, the next step involves evaluating weekly volume breakout patterns. A breakout occurs when the trading volume surges significantly above its average level during a price move beyond a key resistance level. To detect this, switch to the weekly chart and apply a volume indicator. Look for a week where the closing price exceeds a recent consolidation range or resistance level, accompanied by volume that is at least 1.5 times the 20-week average volume.

To calculate average volume, use the formula:
Average Volume = Sum of Volume over N Weeks / N

For example, use N = 20 for a 20-week average. Compare the current week’s volume to this benchmark. A genuine breakout should not only show high volume but also close near the top of the weekly range, indicating strong buying interest. Use horizontal lines to mark previous resistance zones. When the price closes above such a zone on elevated volume, it confirms institutional or large-scale participation.

Avoid false breakouts by waiting for the week to close. Intraday spikes can be misleading. Also, examine the preceding weeks: ideally, volume should have been declining during the downtrend, making the sudden spike more meaningful. This volume expansion on breakout validates the shift in market sentiment and supports the reversal suggested by the monthly RSI divergence.

Examining Daily Price Action: Gap Fills and Pullbacks

With the monthly and weekly signals in place, shift focus to the daily chart to refine entry timing. The condition requires the daily price to step back into a gap. Gaps occur when the opening price of a candle is significantly higher or lower than the previous candle’s close, often due to news or sentiment shifts. Identify unfilled gaps using the “Gap Finder” tool on platforms like TradingView or manually scan for visible spaces between candles.

Focus on downward gaps that appear during the prior downtrend. After the weekly breakout, if the price pulls back and retests the upper boundary of such a gap, it may find support. This “stepping back” behavior indicates profit-taking or short-term hesitation, but not a full reversal of the new uptrend. To trade this, wait for the price to approach the gap zone and show reversal candlestick patterns—such as bullish engulfing, hammer, or piercing line.

Use Fibonacci retracement levels to assess the depth of the pullback. A retrace to the 38.2% or 50% level of the most recent upward move, coinciding with a gap zone, enhances confluence. Place entry orders just above the highest point of the reversal candle. Set a stop-loss below the gap or below the recent swing low to manage risk.

Integrating the Three Conditions into a Trading Plan

To execute this strategy effectively, synchronize all three timeframes systematically. Begin with the monthly chart to confirm RSI bottom divergence. Once identified, switch to the weekly chart and wait for a volume-backed price breakout above resistance. Only after both conditions are met should you monitor the daily chart for a pullback into a prior gap.

• Check if the monthly RSI shows higher low while price makes lower low
• Confirm weekly close above resistance with volume exceeding 1.5x 20-week average
• Identify a downward gap on the daily chart from the bearish phase
• Wait for price to retrace into the gap zone and form bullish reversal patterns
• Enter long on break of the reversal candle’s high
• Place stop-loss below the gap or recent swing low
• Use trailing stop or resistance levels for exit management

Use charting tools to annotate each condition. Save templates with pre-loaded indicators (RSI, volume, Fibonacci) to streamline analysis. Backtest the setup on historical data of assets like Bitcoin or Ethereum to assess win rate and risk-reward ratio.

Risk Management and Position Sizing

Even with strong confluence, market conditions can invalidate signals. Protect capital by applying strict risk management rules. Allocate no more than 2% of total portfolio value to a single trade. Calculate position size using the formula:
Position Size = (Account Risk per Trade) / (Entry Price – Stop-Loss Price)

For example, with a $10,000 account and 2% risk ($200), entering at $30,000 with a stop at $28,500 (risk of $1,500 per unit), the position size would be $200 / $1,500 = 0.133 units. Adjust for leverage if trading futures.

Avoid averaging down on losing trades. If the stop-loss triggers, accept the loss and reassess. Monitor macroeconomic factors and on-chain data (e.g., exchange outflows, whale movements) to contextualize technical signals. Use alerts to stay informed without constant screen monitoring.

Frequently Asked Questions

What if the gap is fully filled during the pullback?

A complete gap fill doesn’t invalidate the setup. The key is whether the price demonstrates rejection at the gap zone. If the candle closes strongly above the gap after testing it, the support holds. Monitor for wicks into the gap and bullish closes.

Can this strategy be applied to altcoins?

Yes, but ensure the altcoin has sufficient trading volume and historical data. Low-liquidity coins may exhibit false breakouts and erratic gap behavior. Prioritize top 50 cryptocurrencies by market cap for reliability.

How long should I wait for the daily pullback?

There is no fixed timeframe. Some pullbacks occur within 1–3 weeks after the weekly breakout. If the price continues to rise without retracing, the setup may be invalid. Consider missing the trade rather than chasing.

Is RSI divergence reliable on monthly charts with limited data points?

Monthly charts have fewer candles, increasing the significance of each signal. While data is sparse, confirmed divergences on this timeframe carry strong weight. Combine with volume and price action for higher confidence.