As updated in my earlier post, Nifty has faced its first major resistance after successfully piercing the 10000 mark. Watching the last Nifty pattern I suggested that Nifty can come down till 9650-9450. Out of my 2 targets, Nifty has already made my first target by making a low of 9685.55 on last Friday. But I also mentioned that this target will not be achieved so easily. RSI 2 strategy suggests that there will be some dead cat bounce before making fresh lows. I will discuss how to play this dead cat bounce now.
What Is RSI 2 Strategy?
- RSI 2 strategy has been discovered by Larry Connors.
- As per this strategy find a stock or index well above 200-day moving average.
- Now if the daily 2-period RSI drops below 5 open up a buy order.
- Exit the long trade if daily 2-period RSI crosses above 60 or 70.
Short Selling Rules As Per RSI 2 Strategy?
- For short selling find a stock or index well below 200-day moving average.
- Now if the daily 2-period RSI rises above 95 open up a short sell order.
- Exit the short trade if daily 2-period RSI crosses below 40 or 30.
Some tweaks on the RSI 2 strategy has been done by me. I have seen that best results are met when RSI crosses below 2 OR above 98 because those are extreme market conditions and the market is highly overbought or oversold.
Checking Nifty As Per RSI 2 Strategy:
On last Friday Nifty has closed at 9710.80. The daily 2-period RSI has closed at 1.04851. So it’s well below 2 and market is highly oversold. On Monday morning open up a buy order on Nifty future OR Nifty August 9700 call option.
If the RSI 2 closes further below you can add to your Nifty future long OR Nifty August 9700 call option. You need to follow the 2-period RSI of Nifty in daily charts on your favourite charting platform and mark an exit as soon as the 2-period RSI crosses back above 60 or 70. I have used Amibroker for my Nifty index chart but you can watch Nifty end of day charts on Zerodha Kite.
Remember this is a positional trading strategy and you need to exit position on the end of the day when 2-period RSI crosses above 60 or 70, so no need to watch the charts whole day, just check the daily charts around 3:15 PM and take your exit decision. I will also add my exit update on this post. Wish you a very happy independence day in advance and loads of profits this independence day.
Exit Update: At market close on 16th August I am seeing the daily 2-period RSI on Nifty index is 76.08. Nifty has closed at 9897.30. Check the above image. So we are booking profits. Its a 187 points gain in only 2 days holding. This is the power of RSI 2 Strategy.
Update For Short Sellers: A bounce is due, so you can short Nifty again once this bounce if over.
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.