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Triple RSI Divergence on Nifty

Nooresh Merani trader
Updated 9 Aug 2022

Buying on RSI Positive Divergences can be a tricky trade as one is going against the trend and only the momentum has stalled during a positive divergence.  Also when the trade does not work out there could be a gap down and can give a much bigger loss than expected. For that reason most prefer to wait for a price confirmation through candlestick formations.


Practice This Strategy

Another way to take this trade is to focus only on Indices where the gap down risks is relatively lower as indices are derived from a bunch of stocks.

This is the setup we are looking out for

  • RSI Triple Divergence to be seen mainly post a good 10% correction from the peaks. Larger the correction better.
  • The 3rd bottom does not stay for a long time and hardly gives you a chance to jump in.
  • Acting either on 2nd bottom or post the confirmation of Triple Divergence is an equally good strategy.
  • Triple Divergence is a great time to Invest as well as Trade.
  • Ideally it should work similarly on finding Tops but it does not as Topping out is a slow process. Panics happen faster.
  • Triple Divergence is not seen often and one has to wait.
  • The tough part is not to spot but to be able to act contrarian and digest the short term pain after entry.
  • The only time it did not work was in October 2008.

Strategy

  • Buy in Parts below 2nd bottom in a range of 1-2%. Keep a stoploss of 3% from entry price.
  • Buy on candlestick reversal or 3 day high after the triple divergence.Stoploss of the candle lows.

Nifty – Triple Divergence in 2011.

  • The first time Nifty hit 30 RSI the bottom was 4720.
  • The next bottom at 4640 and RSI was higher. 2nd
  • The third bottom at 4530 and the RSI was higher. Triple Divergence.
  • The third bottom was around 2.5% lower than the 2nd

Nifty Triple Divergence in 2013

  • The first time Nifty hit 30 RSI the bottom was 5486.
  • The next bottom at 5250 and RSI was higher. 2nd
  • The third bottom at 5120 and the RSI was higher. Triple Divergence.
  • The third bottom was around 2.5-3 % lower than the 2nd

The zoomed in chart for 2013 bottom

Nifty Triple Divergence in 2013.

  • The first time Nifty hit 30 RSI the bottom was 7240.
  • The next bottom at 6870 and RSI was higher. 2nd
  • The third bottom at 6825 and the RSI was higher. Triple Divergence.
  • The third bottom was around 1 % lower than the 2nd

Nifty Triple Divergence in 2018

  • The first time Nifty hit 30 RSI the bottom was 10200.
  • The next bottom at 10140 and RSI was higher. 2nd
  • The third bottom at 1000 and the RSI was higher. Triple Divergence.
  • The third bottom was around 1-1.5% lower than the 2nd

Conclusion

  • In the last 4 major bottoms in Nifty most have shown similar patterns.
  • 3 bottoms with higher RSI.
  • After the first oversold bottom the next 2 bottoms take a few weeks and another 5% drop with the difference between the last 2 bottoms being less than 3%
  • The upsides have been a good 10-20% from the lows.
  • Also all the 4 bottoms have never been visited again in the next few years.
  • The Triple Divergence becomes an excellent entry point for a trade as well as a long term investment.

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Nooresh Merani is an IT engineer by qualification and Advisor/Trainer by profession. He regularly appears as guest analyst on CNBC, ET Now, Bloomberg etc. Read more here - www.nooreshtech.co.in/about Twitter @nooreshtech