Does the rsi overbought pattern work? 55,842 tested
The rsi overbought is taught as a bearish reversal. We found 55,842 of them in 758,032 sessions of S&P 500 history and measured what happened next.
Mean five-day return after the pattern was +0.06%, against +0.31% for the sample as a whole. Two-sided p < 0.001.
What that means
The other side of the RSI coin works as advertised too. Overbought readings are followed by below-average returns. Both effects are real, but they are much smaller than the confidence traders place in them.
How the pattern was defined
14-day RSI closing above 70. The definition is mechanical, which matters: a pattern you can only recognise after the fact is not a pattern you can trade. Anything requiring judgement to spot would score differently for every reader, and could not be tested at all.
The half a backtest cannot answer
A backtest says what the market did. It cannot say what a reader does when the pattern appears, and that is where most of the damage happens. Read the Tape deals the same five blind charts to everyone, so we can see both at once: across 52 settled charts the textbook lean was right on 46.2% of them, and the crowd followed it on 71.2%.
How this was measured
Every pattern is scored the same way. Take 153 S&P 500 names, 2005-01-01 to 2025-01-01, which is 758,032 daily sessions. Mark every bar where the pattern completes, using only information available at that bar. Measure the close 5 trading sessions later, the same horizon the game itself uses. Compare against the base rate across all bars in the same sample, which is 54.7% higher after five sessions.
The comparison is a two-sided test of proportions and the threshold is the conventional 5%. "No measurable effect" means the pattern failed that bar, not that the effect is exactly zero. The code is one file and the definitions are written out in full on each page, so you can disagree with a threshold and see what it changes.
What this does not show
These are unconditional five-day results on large-cap US stocks over one twenty-year window. They say nothing about intraday trading, about other markets, or about a pattern used in combination with something else. A trader who uses the hammer as one input among several is not tested here. Neither is any pattern at a horizon other than five sessions, and a signal can be useless over a week and useful over a quarter.
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