Should I chase the stock price when the RSI is continuously overbought but the stock price refuses to pull back?

RSI can stay overbought in strong uptrends, signaling neither an immediate reversal nor a sell-off, but rather the need for additional tools like volume and price action to assess true momentum.

Jun 18, 2025 at 11:35 am

Understanding RSI and Overbought Conditions

The Relative Strength Index (RSI) is a momentum oscillator used to measure the speed and change of price movements. Typically, an RSI value above 70 is considered overbought, which suggests that the asset might be overvalued or overextended in the short term. However, this does not always mean an immediate reversal will occur. In some strong uptrends, the RSI can remain in the overbought territory for extended periods while prices continue to rise.

Traders often assume that overbought conditions signal a sell opportunity, but this assumption can lead to premature exits or missed opportunities in trending markets. The key lies in understanding whether the market is in a trend or range-bound phase before interpreting RSI signals.

Why RSI Can Stay Overbought in Strong Uptrends

In robust bullish environments, institutional buying pressure can sustain elevated RSI levels. This phenomenon is common during breakout phases or when a stock garners significant media attention or investor interest. Price continuation without pullbacks is not unusual under such conditions.

• Strong fundamentals can support continued buying despite high RSI readings
• Market sentiment and macroeconomic factors may override technical indicators temporarily
• Algorithmic trading systems sometimes ignore traditional signals, especially during momentum runs

This behavior highlights the importance of combining RSI with other tools like moving averages, volume analysis, or candlestick patterns to avoid false signals.

Evaluating Price Action Amid Persistent Overbought RSI

When the RSI remains overbought and the price continues upward, traders should closely monitor price action and volume dynamics. A healthy uptrend usually exhibits increasing volume on up days and stable or decreasing volume on minor pullbacks. If volume begins to wane while the RSI stays elevated, it could indicate weakening momentum.

• Look for signs of exhaustion: long wicks, wide-ranging candles, or sudden volatility spikes
• Compare current price behavior to historical trends: has the stock historically corrected after similar RSI levels?
• Use Fibonacci retracement levels to identify potential support zones where buyers might re-enter

These observations help determine whether chasing the price is justified or if caution is warranted due to overextension.

Risk Management When Chasing Highs

If you're considering entering a position while RSI is overbought and the price refuses to pull back, strict risk management becomes crucial. Entering late in a move requires tight stop-loss placement and realistic profit targets.

• Set clear entry points based on recent support levels or breakout confirmations
• Use smaller position sizes to reduce exposure to potential reversals
• Define your exit strategy before entering the trade, including trailing stops if applicable

Chasing highs without predefined rules increases the likelihood of emotional decision-making, which can lead to substantial losses.

Alternative Strategies Instead of Chasing the Price

Rather than trying to enter at higher levels, consider alternative strategies that align with the ongoing momentum while managing risk effectively:

• Wait for a pullback to a key moving average, such as the 20-day or 50-day EMA
• Monitor for bullish chart patterns like flags, pennants, or ascending triangles forming near resistance
• Use options strategies like call spreads or calendar spreads to participate in upside moves with defined risk

These approaches allow traders to stay engaged with the trend without necessarily chasing breakouts blindly.

Frequently Asked Questions

Q: Can RSI stay overbought indefinitely?

Yes, particularly in strong uptrends or during periods of extreme buying pressure. Momentum-driven assets, especially in speculative markets like cryptocurrencies or growth stocks, can maintain overbought RSI readings for weeks or even months.

Q: Should I short a stock just because RSI is overbought?

No, shorting based solely on RSI being overbought is risky. Many stocks and assets can defy technical indicators during strong rallies. Always incorporate additional confirmation signals and manage risk appropriately.

Q: What other indicators work well with RSI in trending markets?

Moving Averages (like the 200-day SMA), MACD, and Bollinger Bands are commonly used alongside RSI to filter false signals. Volume-based indicators such as OBV (On-Balance Volume) also provide useful context in trending environments.

Q: How do I know if a stock is truly overextended despite high RSI?

Look for divergence between price and momentum indicators, declining volume, or failure to make new highs on increasing volatility. These signs may suggest that the trend is losing steam, even if RSI remains elevated.