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?
There are many RSI 2 strategies available in the market. Among them 4 of the strategies are given below:
- RSI 2 strategy has been discovered by Larry Connors.
- As per this strategy find a stock or index well above the 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?
Here, are the short-selling rules as per the RSI 2 strategy. The top three strategies are as follows:
- For short selling find a stock or index well below the 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 the 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 favorite 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 at 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 to this post. I 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 the 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 the RSI 2 Strategy.
Update For Short Sellers: A bounce is due, so you can short Nifty again once this bounce if over.