Daily Commentary - Posted on Thursday, March 11, 2010, 9:22 AM GMT +1
Implications of High RSI(2) Readings
On Wednesday’s session, and with respect to the SPY (SPDR S&P 500 ETF), Wilder’s Relative Strength Index (RSI) for a 2-day period closed above 95 the sixth day in a row, and above 99 on the fourth consecutive session.
With respect to the latter, the last occurrence dates back 15 years (see stats below), which – at least with respect to historical probabilities and odds – might have positive implications looking out 10 sessions ahead.
Table I below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the RSI(2) closed above 99 on the fourth consecutive session.
Interesting to note that historical probabilities favor a continuation of the uptrend over the course of the then following 10 sessions. After four consecutive RSI(2) readings above 99 (on the close), the SPY closed higher 5 sessions later on 12 out of 14 occurrences, and was never trading (intraday, not only on the close) lower than -1.46% below the trigger day’s close over the course of the then following 5 sessions, so historically downside potential was more or less not existent. In addition, the SPY was trading higher 10 sessions later on 11 out of those 14 occurrences, and did never close lower greater than -0.29% below the trigger day’s close.
And on a session immediately following a fourth reading above 99 (in this event on Thursday, March 11), the SPY never lost more than -0.33% on the close, although one should be carefull to read anything statistically relevant into something with 14 occurrences only over the course of 20 years .
But with Distribution of Returns (represents where the setup’s median return is ranked in comparison to the – ranked in descending order – median at-any-time return) only slightly above/below the 50% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions, and the SPY closing higher greater than +1.0% five sessions later on only one out of those 14 occurrences, upside potential will probably be limited as well, so a sideways trading, rangebound marked with an upside bias seems tto be he most likely outcome.
Almost the same conclusion can be drawn with respect to historical occurrences where the RSI(2) closed above 95 on six consecutive sessions. Table II below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session where the RSI(2) closed above 95 on the sixth consecutive session.
Historically on a session immediately following a sixth reading above 95 (in this event on Thursday, March 11), the SPY never lost more than -0.47% on the close (24 occurrences), and did never close lower than -0.43% below the trigger day’s close 4 sessions later. And out of those 24 occurrences, the SPY has always posted at least one higher high than the trigger day’s intraday high over the course of the then following 10 sessions.
Disclaimer: No position in the securities mentioned in this post at time of writing.
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