The RSI Indicator 91

Chart 4.9 Dollar Index Weekly and 26-Week RSI

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1. Failure Swings. Wilder's “failure swing" is illustrated in figure 4.3.

This swing occurs at both tops and bottoms. It is. in effect, a variation
of the peak-and-trough analysis described in chapter 2. The accepted
wisdom is that failure swings are most significant after the RSI has
moved through an overbought or oversold level (i.e., a level above 70
for a rally or below 30 in the case of a decline for the standard 14-day
span). Once the peak reaches 70 or higher, a reaction sets in. A failure
swing occurs when the next rally fails to surpass its predecessor and
the second reaction pushes the RSI below the previous low. The
second, or failing rally can take the form of one large movement or
several small ones. The key to determining whether a failure swing
has been signaled lies in the fact that the second rally does not exceed
the first. Failure swings also occur at bottoms where the exact
opposite set of conditions appear. This would involve a decline below
the oversold level, a subsequent rally, a successful “test" of the
previous low, and finally a rally that takes the index above the
previous high. Generally, the more extreme the reading at the