Low RSI and future Returns

Good friend, Nooresh has recorded a presentation where he showcases as to how a low RSI has more or less meant a sharp move on the higher side in the coming days. While his presentation (you can check it out here) provides us with visual evidence, I wanted to see how this would translate if I left out the chart and just used data points from the day RSI went below 30 (14 days of lookback).

Here is the pic of the days and where Nifty ended 5 days, 10 days, 20 days, 40 days and 60 days later.

and here are some stats culled from the above data

As can be seen, while its true that this can turn out to be a great opportunity to buy into the decline, it does not come without some amount of volatility. Most of the negative out there were from bear markets and unfortunately its only very late in the day that we find out that the fall that seemed out of the normal was just the start of a extended phase of bearishness and not exactly “buy on dip”.

In my last blog post I wrote that I do not believe (again, backed by historical data) that markets are cheap (there would always be some stocks that are cheap, but then again, we are looking at the overall markets) but yet cheap enough that some amount of exposure is warranted. The above data to be is inconclusive as to whether this is the final dip before we spring back to new highs or one that is one of the several dips we may see going forward.

As a trader, I am currently long but as a investor, I would wait for further evidence to build (of course, evidences comes with cost of opportunity) before I think that the current markets warrant 100% exposure (current exposure levels based on my Asset Allocation model is max of 50 / 60% for the aggressive investor) .