Take this post with caution, because I admit I have not backtested it in any kind of methodical way. “Use it at your own risk.” Of course, everything I say (per my disclaimer at the bottom of course) is at your own risk but I felt a special duty to say it today.
I mentioned BAMM yesterday as a stock that had an RSI of over 90. I am employing a new strategy for use in markets which are extremely bullish or extremely bearish. I think this strategy will work. The downside is that it cannot be deployed very often since the markets do not swing to extremes very often.
I’m calling it the RSI 93/10 strategy. My sample pool is not large, but one observation I have made after looking at numerous 2-year charts is that it is more common to have stocks above RSI 90 in bullish runs than it is to have stocks below 10 during bearish runs. I’m using the October and March lows as examples of my extreme “bearish” markets and this recent run as an extremely “bullish market.” I use the 14-day period length when using RSI.
My strategy is simple. When a stock closes with an RSI at or above 93, I will short it the next day at the open. When a stock closes with an RSI below at or below 10, I will buy it on the open the next day. Because it seems more common for overly bullish stocks to exceed 90, I bumped the entry point up to 93 rather than 90. While this extra margin might create missed opportunities, I think it is important because there are many instances where there is a final powerful above 90. The extra margin not only reduces the chances of being early but in many instances will allow shorting at a higher price. I’m not willing to cheat on this. I would rather miss opportunities. After all, this is just one little tool in the toolbox.
BAMM is my most recent example. Notice that RSI got up to 94. If you entered at RSI 90 you would be in the green after the big drop today but not by much. I’ve seen many stocks exceed 90 and I think this extra margin is important.
In contrast, take a look at MOT chart from January 2008.
RSI actually hit 8. Also notice the huge volume signaling capitulation.
Of course, both on the long side and short side this strategy can be combined with basic technical analysis. I’m not recommending checking commonsense at the door. If a stock is at RSI 90 but right up against resistance it might be worth shorting on basic TA principles with the high RSI adding support to the technical setup.
The 93/10 strategy puts TA aside and is intended to be a mechanical strategy without employing TA.
The last question is when do you close your position? I would use regular TA principles such as support and resistance. This also means having a target price in mind before entering the trade.
I would be happy to hear from others that have some +93 RSI stocks on their watchlist.
Here are a couple of ideas.
TRGT is ready to go. RSI is at 94.66.
LCRD might be on its way. RSI is at 90.