The RSI indicator has become an increasingly popular technical tool. Mathematically designed by Welles Wilder in the late 1970s, Relative Strength Indicators have found their way to all financial markets with excellent results.

The study itself is a mathematical equation of internal strength of the underlying instrument, not to be confused with comparison strength indicators of one particular market versus another.

As with other oscillator tools, the RSI serves to identify key points in the market where price reversal may be imminent.

It is also an excellent forecasting tool for future market direction based on divergence between the RSI line and actual market behavior.

The indicator trades between value lines of 0 and 100. The most common setting within is an oversold line at 30 and overbought line at 70. RSI-line action touching or exceeding these two zones are warning signs of near-term market reversal.

The following charts depict this study in action:

(Daily Chart, Wal-Mart)

Four visible points on this chart show where the RSI line has touched or broken 30/70 extreme ranges. Notice how sharply price action turned as the line bounced back into "fair value" between 31 and 69.

(Daily Chart, GE)

The first half of this GE chart shows the RSI mirror rising prices. The second half paints a different picture.

GE closing prices continue to inch upward while its RSI line clearly breaks from overbought to trend downward. Such price/ indicator divergence suggests GE may struggle or fail to reach new price highs without a rest or dip beforehand.

(Daily Chart, NASDAQ)

Here again we see five touches or entries into extreme zones and subsequent price action to follow. With RSI being a lagging indicator, traders need to be vigilant as it approaches the 30 or 70 levels of its range.

Checking the overall strength of a major index and trading with its direction is vital for long-term success.

(Daily Chart, PDLI)

Highly-volatile stocks like PDLI actively bounce within their extreme range. Here we have six touches of 30/70 extreme lines to signal possible price correction.

In addition, PDLI forms a clear RSI divergence pattern to warn us of almost-certain price failure. The stock continued to close higher in the session while RSI indicator formed a clear down trend heading towards 30 extreme.

A $25 price swing ensued before the RSI trend resumed its upward course.

As with all technical tools, RSI is not designed to be a stand alone signal. In conjunction with other technical studies it can and does offer solid trading signals for traders to enter new plays or protect profits gained.