Article
“Relative Strength Index (RSI) as A Predictor of Overbought and Oversold Conditions in Defence Company Stocks”
Technical analysis has gained increasing relevance in financial markets as investors seek systematic approaches to identify profitable trading opportunities. Among momentum-based indicators, the Relative Strength Index (RSI), originally developed by Welles Wilder (1978), is widely employed to detect overbought and oversold market conditions. The present study investigates the effectiveness of RSI in generating trading signals and predicting price movements in selected Indian defence sector stocks, namely Bharat Dynamics Limited (BDL), Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Garden Reach Shipbuilders & Engineers (GRSE), and Zen Technologies (ZEN). Building on the theoretical foundations of technical analysis proposed by Murphy (1999) and empirical evidence provided by Brock et al. (1992) and Lo et al. (2000), the study evaluates whether RSI-based signals possess predictive power in a strategically important and rapidly expanding sector of the Indian equity market.
The study adopts a descriptive-correlational research design with a quantitative time-series approach based on secondary data covering the period from 2015 to 2025. Daily stock prices, RSI values, and market volatility measures constitute the dataset. Descriptive statistics, correlation analysis, t-tests, and regression techniques are employed to assess the relationship between RSI signals and subsequent stock returns.
The empirical findings reveal that RSI has significant predictive power for defence sector stocks. The average return following RSI-generated signals is 21.66%, which is statistically significant (t = 15.962, p < 0.001; 95% CI: 18.95%–24.37%), indicating that RSI-based strategies are associated with substantial and consistent price movements. However, correlation analysis shows heterogeneous outcomes across firms, with a pooled correlation coefficient of 0.19, suggesting an overall weak association between RSI values and the magnitude of subsequent price changes. While GRSE exhibits a moderate positive relationship, other firms display weak or statistically insignificant correlations. These findings imply that although RSI is effective in identifying directional trading opportunities arising from overbought and oversold conditions, its explanatory power regarding the extent of price movements varies across companies. The study contributes to the growing literature on technical analysis in emerging markets and provides practical implications for traders and investors seeking momentum-based investment strategies in the Indian defence sector.
This study contributes to the existing literature by focusing exclusively on the application of the Relative Strength Index within the Indian defence sector, an area that has received limited empirical attention. Unlike prior studies centered on broader indices or IT stocks, this research provides sector-specific insights into RSI performance.
The study is limited to selected defence companies and relies solely on technical indicators without incorporating macroeconomic, fundamental, or behavioural factors. Additionally, market anomalies, policy changes, and sector-specific developments may influence price movements beyond RSI signals.
The findings suggest that RSI can be effectively used by investors and traders to identify entry and exit points in defence stocks. However, combining RSI with other analytical tools and risk management strategies may enhance decision-making accuracy.
This research promotes informed investment decisions by encouraging the use of data-driven technical analysis, thereby reducing speculative trading behaviour in emerging sectors like defence.