RSI & PEG Investing Strategy

Understanding RSI and PEG

1. Relative Strength Index (RSI)

• A technical indicator that measures the speed and magnitude of price changes to identify overbought or oversold conditions.
• RSI ranges from 0 to 100:
  • Overbought: RSI > 70 (stock may be overvalued and due for a correction).
  • Oversold: RSI < 30 (stock may be undervalued and primed for a rebound).

2. Price/Earnings-to-Growth (PEG) Ratio

• A fundamental valuation metric that evaluates a stock’s P/E ratio relative to its earnings growth rate.
• Formula: ​
• Interpreting PEG:
  • PEG < 1: Undervalued (good buying opportunity).
  • PEG = 1: Fairly valued.
  • PEG > 1: Overvalued.

The RSI & PEG Strategy

This strategy uses the RSI to identify short-term buying opportunities in fundamentally strong stocks identified by the PEG ratio. The approach works best in volatile or trending markets.

Example: Using RSI & PEG Strategy

Stock: ABC Corp.

• P/E Ratio: 15
• Earnings Growth Rate: 20%
• PEG Ratio: 15/20=0.75 (undervalued)
• RSI: 28 (oversold condition)

Action:

• Buy ABC Corp., as it has strong fundamentals (PEG < 1) and is oversold (RSI < 30).
• Target exit when RSI exceeds 70 or PEG rises above 1.2.

Benefits of RSI & PEG Strategy

1. Combines Technical and Fundamental Analysis:

   • PEG ensures the stock is fundamentally sound.
   • RSI identifies optimal timing for entry.

2. Reduces Risk:

   • PEG ensures you’re not overpaying for growth.
   • RSI minimizes the chance of buying during a downtrend.

3. Works in Volatile Markets:

   • RSI detects short-term sentiment shifts, ideal for trading in choppy markets.

Best Practices

• Combine with Other Indicators:

  • Use RSI and PEG alongside volume analysis, support/resistance levels, or moving averages for confirmation.

• Diversify Across Sectors:

  • Avoid concentration in one industry; some sectors (e.g., tech) tend to show lower PEG ratios.