Combining a relative-strength index and trend filters for oversold setups

What is being stacked

A relative-strength index is a bounded oscillator built from average gains and losses over a defined lookback, commonly used to mark overbought and oversold conditions. This article walks through how that oscillator is paired with a price-only volatility proxy and with moving averages that both damp indicator noise and define a long-horizon trend regime.

The trend filter is the directional screen in the stack. It is the step that asks whether an oversold or overbought reading occurs with the prevailing trend, typically defined by price relative to a long moving average.

How the 14-period relative-strength index is built

A 14-period relative-strength index is formed from the ratio of average gains to average losses, producing a bounded daily reading that can range from 0 to 100. After the first 14-period window, subsequent relative-strength averages are updated with a 13-plus-current smoothing step rather than a simple restart of the lookback.

A price-only volatility proxy

A price-only volatility proxy, the vix-fix, is a stand-in for implied-volatility spikes. It is computed from the highest close over the latest 22 trading days minus the current low, scaled by that high close, then multiplied by 100 and shifted by 50.

How VixRSI is formed

The composite VixRSI reading is the three-day exponential moving average of that volatility proxy divided by the three-day exponential moving average of the 14-period relative-strength index. Those short exponential averages are the moving-average step that damps noise in each component before the ratio is taken.

As formulated, the composite is inverted: oversold conditions tend to coincide with higher readings and overbought conditions with lower readings.

Example oversold setups and the 200-day screen

Example oversold setups include a composite reading of 1.40 or higher, a one-day decline after first exceeding at least 1.40, or a decline after at least three consecutive rising days once the reading has exceeded at least 1.00.

Oversold spikes in the composite are described as more useful when the security is in an identifiable uptrend, for example when the close is above its 200-day simple moving average. That long simple moving average is the trend-regime half of the moving-average role in this stack.

A companion RSIjk oscillator

A companion oscillator, RSIjk, recenters the 14-period relative-strength index around zero, adds a three-day change term, smooths that sum with a two-day exponential average, then adds the centered reading back. The result is a signed scale that can range from 100 to -100.

Less stringent cutoffs and lookback length

Using the same two composites with less stringent cutoffs, such as a VixRSI above 1.00, an RSIjk below -16, and a close above the 200-day simple moving average, identifies more candidate setups. Some of those setups may arrive earlier or fail to develop as cleanly as setups from tighter cutoffs.

Shortening the 22-day volatility window or the 14-day relative-strength window makes the composites more volatile and more likely to spike. Lengthening those windows tends to isolate only more extreme oversold readings.