How RSI Predicts Stock Returns and Drives Short Interest: Key Findings Across Major Stocks

The Relative Strength Index (RSI) negatively correlates with stock returns and influences short interest. Stocks like JP Morgan (JPM), Amazon (AMZN), and Walmart (WMT) exhibit this pattern, with significant short activity during upward movements. Traders may use RSI as a strategic tool, as higher RSI levels often result in increased short interest.

The Relative Strength Index (RSI) is an oscillator that ranges from 0 to 100. Readings above 70 are considered overbought, while readings below 30 are considered oversold.

This is a widely followed technical indicator.

We found that stock daily returns are negatively correlated with the RSI score, meaning that the market may be using the indicator or following a similar strategy.

We examined the twenty largest stocks.

The stocks with the highest negative correlation between the 14-day RSI and the following day’s returns are JPM, AMZN, WMT, and AVGO.

For AMZN, the correlation is -0.11, so a higher RSI number leads to a lower return.

We also analyzed short positions. On average, there is shorting during upward movements, when the stock is oversold.

The stocks with the strongest correlation between the RSI and short positions are V, COST, PG, HD, BRK/B, LLY, and AAPL, in that order.

This suggests that investors may be using the RSI or similar strategies.

BRK/B and LLY are the only stocks that show a reversal pattern in both the stock price and short position with significant changes.

Here are two examples demonstrating how the numbers work.

For V, with a baseline short interest of 2%, each day the RSI is at 70, short interest increases by 0.02%. If this trend continues for a week, the short interest will rise by 0.1%, or 5% of the initial short position.

The higher the RSI, the greater the short interest. Conversely, when the RSI is low (i.e., oversold), short interest declines as traders cover their positions or buy.

The next graph shows the returns as a function of the RSI for JPM.

When the RSI is 30, the average return is 0.6%.

This analysis highlights the RSI’s predictive value for stock returns and short interest. Negative correlations and trends suggest market participants rely heavily on RSI-driven strategies. Understanding these dynamics provides valuable insights into shorting patterns and price movements, especially for key stocks like JPM, AMZN, and AVGO.

Want to know more?

Access this data in real time using S3’s BLACK APP or Contact us to get started.