How is the Relative Strength Index (RSI) oscillator interpreted regarding overbought/oversold levels, and what is a 'Bullish Divergence'?

[ A ]RSI oscillates from 0 to 100 (traditionally overbought >70 and oversold <30); a 'Bullish Divergence' occurs when the stock price makes a new lower low while the RSI indicator forms a higher low, signaling that downward selling momentum is exhausted and an upward reversal is likely.[ CORRECT ]

[ B ]RSI measures the weight of physical gold in kilograms, with values above 70 indicating counterfeit gold.

[ C ]A Bullish Divergence occurs when the RSI drops to negative 500 during an intense market rally.

[ D ]RSI values always remain locked at exactly 50.0 across all securities and market cycles.

Takeaway

Option A is correct: RSI oscillates from 0 to 100 (traditionally overbought >70 and oversold <30); a 'Bullish Divergence' occurs when the stock price makes a new lower low while the RSI indicator forms a higher low, signaling that downward selling momentum is exhausted and an upward reversal is likely.

Derivation

The Relative Strength Index (RSI, developed by J. Welles Wilder) is a momentum oscillator measuring the speed and magnitude of recent price changes on a scale from 0 to 100: (1) Standard Thresholds: RSI > 70 indicates an overbought condition (potential pullback/consolidation), while RSI < 30 indicates an oversold condition (potential technical rebound). In strong bull markets, RSI often ranges between 40 and 80, rarely breaking below 40. (2) Bullish Divergence: Occurs when price sinks to a new swing low, but RSI makes a higher low (refusing to make a new low). This indicates that selling pressure is dissipating, providing an early buy signal. This tests RSI divergence analysis. The common trap is treating overbought RSI (>70) in strong bull trends as an immediate short signal.

Why the others fail

B — RSI measures the weight of physical gold in kilograms, with values above 70 indicating counterfeit gold.

RSI is a mathematical technical momentum ratio, having no connection to physical gold mass or bullion authenticity.

C — A Bullish Divergence occurs when the RSI drops to negative 500 during an intense market rally.

RSI is strictly bounded on a mathematical scale between 0 and 100; negative values cannot exist mathematically.

D — RSI values always remain locked at exactly 50.0 across all securities and market cycles.

RSI fluctuates continuously between 0 and 100 reflecting the ratio of average gains to average losses over 14 periods.