Triple RSI Divergence on Nifty

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Updated: 28 August 2020

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.

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.