How to operate when the monthly RSI is in the overbought area + the weekly negative line shrinks + the daily line falls below the 10-day line?

Monthly RSI overbought, weekly momentum weakening, and daily price below 10-day MA signal potential correction—use confluence for strategic shorts with tight risk control.

Jul 25, 2025 at 05:49 am

Understanding the Monthly RSI in the Overbought Zone

When the monthly RSI enters the overbought area, typically defined as a reading above 70, it signals that the asset has experienced strong upward momentum over a prolonged period. This does not automatically indicate a reversal, but it does raise caution among traders. The monthly timeframe carries significant weight because it reflects long-term sentiment and institutional positioning. A sustained overbought condition may suggest that the market is stretched and vulnerable to a correction. It's critical to avoid making decisions based solely on this signal. Instead, it should be used in conjunction with other indicators to confirm potential turning points. Traders should monitor price action closely for signs of exhaustion, such as long upper wicks, shrinking volume on up days, or failure to make new highs.

Interpreting the Shrinking Weekly Negative Line

The weekly negative line shrinking refers to a reduction in the downward momentum observed on the weekly chart. This can be seen in indicators like the MACD, where the negative histogram bars become smaller, or in momentum oscillators where the downward slope flattens. This suggests that selling pressure is weakening, which might precede a potential reversal or consolidation. However, a shrinking negative line does not confirm bullish momentum yet—it only indicates that bearish force is diminishing. It's essential to watch whether this contraction leads to a crossover or a shift into positive territory. If the negative line continues to shrink while price holds above key support levels, it may indicate accumulation or a pause before a renewed move. Traders should look for confirmation through price action and volume patterns on the weekly close.

Daily Line Falling Below the 10-Day Moving Average

When the daily price line falls below the 10-day moving average (MA), it marks a short-term bearish shift. The 10-day MA is a widely followed indicator for near-term trend direction. A close below this level can trigger algorithmic sell-offs and stop-loss activations, amplifying downward movement. This signal gains more significance when it occurs after an extended rally. Traders should assess whether the break is accompanied by high volume, which would validate the bearish shift. If the price remains below the 10-day MA for multiple sessions, it may indicate a new short-term downtrend. Monitoring how price reacts upon retesting the 10-day MA as resistance can provide insight into market sentiment. A failed retest—where price is rejected when attempting to move back above—strengthens the bearish case.

Combining the Three Signals: Strategic Entry and Exit Points

The convergence of monthly RSI overbought, shrinking weekly negative line, and daily line below the 10-day MA creates a complex but actionable scenario. This combination suggests a potential exhaustion of bullish momentum at higher timeframes, weakening bearish pressure on the intermediate level, and a confirmed short-term downturn. Traders should consider reducing long exposure or initiating short positions with strict risk management. A practical approach includes:

• Wait for confirmation on the weekly close to ensure the shrinking negative line isn’t a temporary fluctuation.
• Observe whether the daily candle closes below the 10-day MA for two consecutive days to confirm trend weakness.
• Use resistance zones from previous price swings as potential short entry points.
• Place stop-loss orders above the recent swing high to limit downside risk in case of a false breakdown.
• Scale out of positions gradually as price moves in the expected direction to lock in profits.

This multi-timeframe alignment increases the probability of a meaningful correction, but caution is needed due to conflicting signals between weekly stabilization and daily weakness.

Practical Steps for Executing the Trade

To act on this setup, follow these detailed steps:

• Open your trading platform and ensure you are viewing the cryptocurrency pair in question with monthly, weekly, and daily charts visible.
• Check the monthly RSI indicator—confirm it is above 70 and has been in the overbought zone for at least one full month.
• Switch to the weekly chart and locate the momentum indicator (e.g., MACD or Stochastic). Verify that the negative histogram or line is visibly shrinking compared to previous weeks.
• Navigate to the daily chart and plot the 10-day simple moving average. Confirm that the most recent closing price is below this line.
• Identify key support and resistance levels using horizontal lines or Fibonacci retracement tools.
• Set a sell limit order slightly below the current price if you anticipate a retest of resistance.
• Define your stop-loss above the last significant weekly high, ensuring it aligns with your risk tolerance.
• Set multiple take-profit levels—for example, one at the 38.2% Fibonacci retracement and another at the 61.8% level.
• Enable price alerts for when the daily close moves back above the 10-day MA, which could signal a reversal of the bearish setup.
• Record the trade setup in a journal, noting the confluence of signals and your reasoning.

This structured method ensures that emotional bias is minimized and decisions are based on objective criteria.

Risk Management and Position Sizing

Even with strong confluence, no signal is guaranteed. Therefore, risk management is paramount. Never risk more than 1–2% of your trading capital on a single setup. Calculate your position size based on the distance between entry and stop-loss. For example:

• If your stop-loss is 5% away from entry, your position size should be 20 times smaller than if the stop were 0.25% away.
• Use a trailing stop once the price moves favorably to protect gains.
• Avoid adding to losing positions under this setup, as it contradicts the initial premise of weakening momentum.
• Monitor funding rates and open interest in futures markets—if longs are still dominant, a sharp liquidation event could accelerate the move.
• Consider hedging with options if available, such as buying put options as insurance against a deeper correction.

Frequently Asked Questions

What if the monthly RSI stays overbought for several months?

Extended overbought conditions can occur during strong bull markets. Assets like Bitcoin have previously remained above RSI 70 for multiple months. In such cases, the signal loses urgency, and traders should focus more on trend strength and volume rather than RSI alone.

Can the shrinking weekly negative line turn bullish later?

Yes. A shrinking negative line often precedes a bullish crossover. If the momentum indicator on the weekly chart flips positive while price holds above a key moving average, it may signal a resumption of the uptrend despite the daily weakness.

Should I exit the trade if the daily price closes back above the 10-day MA?

Yes. A close above the 10-day MA invalidates the short-term bearish signal. This could indicate renewed buying interest. Traders should reassess the setup and consider closing or adjusting the position accordingly.

How do I confirm whether the correction will be shallow or deep?

Look at volume during the breakdown, the presence of bullish or bearish divergence on lower timeframes, and key support levels. A deep correction is more likely if volume spikes on down days and price breaks through major support with ease.