As I was performing my evening chart-chomping last night, I was struck by the low RSI2 levels on all the major indices. If my memory serves, QQQ was below 1 and SPY was below 4. These are extreme RSI2 readings, yet a quick but not exhaustive search of the blogosphere did not return any articles on the low RSI2 reading. I found that odd because 3 to 5 years ago, RSI2 was all the rage and such an extreme reading would have sparked numerous articles.
Like most fads, it seems the RSI2 popularity has faded.
This is not a surprise as the indicator did hit a period of sub-par performance, and anyone who discovered it during its fad stage likely started trading it as the effectiveness was waning.
But RSI2 is not dead.
The indicator, at extreme readings, is still very effective at predicting short-term, over-sold bounces, similar to what we are seeing this morning.
Last night, I ran a few quick tests on QQQ and SPY, and the extreme readings we saw last night typically lead to a higher close within approximately 5 days, roughly 70-80% of the time. That is an impressive win rate. And those stats include the recent years of sub-par performance.
Starting tonight I will dust off some of the older RSI2 systems and re-evaluate them to see how they have performed since the Armageddon trade of 2008-2009. I may even present a very simple, yet still my favorite RSI2 system, never before published on my blog.
Stay tuned…Until then, enjoy the bounce!