What does a decline after the 14-day moving average (RMS) forms a double top above 70 in the RSI indicator?

Understanding the RSI and Its 14-Day Moving Average

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale from 0 to 100. It is most commonly calculated over a 14-day period, making the 14-day RSI a standard benchmark in technical analysis. When the RSI rises above 70, it typically signals that an asset is overbought, suggesting a potential reversal or pullback may follow. The 14-day moving average of the RSI, sometimes referred to as the RMS (Root Mean Square) in certain analytical contexts, smooths out the RSI values and helps identify underlying momentum trends. This moving average acts as a dynamic support or resistance level within the RSI chart, offering traders a clearer view of momentum shifts.

Formation of a Double Top in RSI Above 70

A double top pattern in the RSI occurs when the indicator climbs above 70, pulls back slightly, and then rallies back to test or slightly exceed the prior peak before reversing downward. This formation mirrors the classic price chart double top and implies weakening bullish momentum. When this pattern forms specifically above the 70 threshold, it strengthens the overbought signal. Each peak represents a failed attempt by buyers to push momentum higher, and the inability to sustain new highs in RSI suggests diminishing upward pressure. The 14-day moving average of the RSI often acts as a guide during this phase — if the RSI peaks are both above this moving average and then fall below it after the second peak, it confirms a bearish crossover.

Implications of a Decline After the Double Top

When the RSI begins to decline after forming a double top above 70, it indicates a shift from overbought conditions to potential bearish momentum. This decline is particularly significant if it breaks below the 14-day RSI moving average, as this crossover signals that short-term momentum is turning negative. Traders interpret this as a bearish divergence if the underlying asset’s price continues to rise or holds steady while the RSI falls. Such a divergence highlights a disconnect between price action and momentum, often preceding a price correction. The steeper the drop from the second peak, the stronger the bearish signal, especially if accompanied by increasing volume on the downside.

How to Confirm the Signal with Price Action and Volume

To validate the significance of the RSI double top and subsequent decline, traders should cross-reference with price chart patterns and trading volume. The following steps can be taken to confirm the signal:

• Check whether the asset’s price has formed a corresponding double top or resistance level near the same timeframe.
• Look for increased selling volume as the RSI declines post-double top, which reinforces the bearish momentum.
• Observe if the price breaks below a key support level or moving average (e.g., 50-day or 200-day SMA) shortly after the RSI reversal.
• Monitor for lower highs in price aligning with the second RSI peak, reinforcing the divergence.

These confirmations help distinguish a genuine reversal signal from a temporary overbought correction. Without alignment in price and volume, the RSI pattern may produce a false signal.

Trading Strategy Based on This RSI Pattern

Traders can use the RSI double top above 70 followed by a decline as a cue to initiate short positions or exit longs. The following steps outline a detailed operational approach:

• Wait for the second peak in the RSI to form and show signs of rejection at or below the first peak’s level.
• Confirm that the 14-day RSI moving average is crossed downward as the RSI begins to fall.
• Enter a short position or place a sell order when the price shows confirmation, such as a bearish candlestick pattern (e.g., engulfing or shooting star).
• Set a stop-loss just above the second RSI peak or the corresponding price resistance level to manage risk.
• Use the 30 level in RSI as a potential target for the downward move, as it marks the oversold threshold and possible reversal zone.

This strategy works best in ranging or bearish trending markets and should be avoided during strong bullish trends where overbought conditions can persist.

Common Misinterpretations and Risk Factors

One frequent error is acting on the RSI double top without waiting for confirmation. An RSI decline immediately after the first peak does not constitute a double top — both peaks must be clearly defined. Another risk is ignoring the broader market context; in a strong uptrend, assets can remain overbought for extended periods, making RSI signals less reliable. Additionally, the 14-day RSI moving average may lag during volatile periods, leading to delayed signals. Traders must also consider asset-specific volatility — cryptocurrencies, for instance, often exhibit exaggerated RSI swings, increasing the likelihood of false signals. Using this pattern in isolation without price or volume confirmation can lead to premature entries and losses.

Frequently Asked Questions

Q: Can the RSI double top above 70 occur in sideways markets?Yes, the RSI double top above 70 frequently appears in consolidation or range-bound markets, where prices oscillate between support and resistance. In such environments, overbought conditions are common at the upper range, and the double top signals a likely rejection from resistance, reinforcing the range dynamics.

Q: Does the 14-day RSI moving average have to be rising for the double top to be valid?Not necessarily. While a rising RSI moving average indicates bullish momentum, a double top can still form during a flat or slightly declining 14-day RSI MA. The key is the failure to make a higher high in RSI and the subsequent breakdown below the moving average for confirmation.

Q: How long should traders wait for confirmation after the second peak?Traders should monitor the next 1 to 3 candlesticks following the second peak. If the RSI closes below the 14-day moving average and the price shows bearish follow-through, confirmation is likely. Waiting beyond three periods may result in missed entries or reduced risk-reward ratios.

Q: Is this pattern effective for all cryptocurrencies?The pattern is applicable across most liquid and actively traded cryptocurrencies, such as Bitcoin and Ethereum. However, in low-cap or low-volume altcoins, erratic price swings can distort RSI readings, making the double top less reliable. Higher timeframes (e.g., 4-hour or daily) improve the signal’s accuracy.