THE BIG IDEA
Sometimes you get trading ideas that are so wrong that they are actually useful.
This week, we bring you the tale of a trade setup that looked interesting to us but ended up giving us a very different message. It involves the Relative Strength Index, or RSI, and the ARK Innovation ETF (ticker: ARKK).
RSI is one of the more popular technical analysis indicators amongst traders. It is available on pretty much any stock market charting tool out there. Most people, however, never use anything but the default setting of 14 periods. The Prime Wave is part of a minority that often uses a 2-period calculation, along with a different interpretation.
We applied RSI(2) to the notorious ARKK ETF. According to Cathie’s Ark, an independent website that monitors the fund, the top holdings currently are Tesla, SpaceX, and Tempus AI. We like to track ARKK as a benchmark for the amount of “animal spirits” in the market.
We noticed that the fund recently had a string of five days in a row when RSI(2) had a value above 90. This is something that rarely happens. To get there, you need a sustained upward jolt in the price series. For a fund like ARKK, it represents a frenzy of buying in speculative/hot stocks.
We figured it could be a sign of a market getting a little overheated and maybe some reversion to the mean was coming.
It turns out that this situation has come up five times in the post-covid era. The outcomes are summarized in the table below.
It is true that the days immediately afterward are pretty lackluster (especially if you put your thumb over the number for 2025) but not nearly as bad as what might have been expected.
The real surprise is how strong the ensuing days and weeks are.
A 4% gain for the market over three weeks is not too shabby.
So, it turns out that a period of up-up-up in a highly speculative fund like ARKK is not a warning of some cooling ahead. Instead, this data points to a continuation of good times for the stock market.
SEEN ON THE INTERNETS
There is a fascinating article, written nine months ago, that keeps bubbling up on the internets from time to time. It recently came to our attention via Barry Ritholtz’s blog.
Lauren Leek detailed her attempt to see if a regular person (albeit with a PhD in political economy) could replicate the main machinery of a “Quant” hedge fund.
She perhaps over-generalizes how such funds operate (but what do we know?). However, she did produce and operate a sophisticated and useful trading strategy using some Python code running on her own laptop.
In the end, Leek itemizes all the ways that hedge funds have an advantage over individual traders, which are outside of the actual trading strategy. She concluded that “the real skill isn’t predicting the future; it’s building systems that don’t break when the future changes”.
NUMBERS ONLY
14.25 | The VIX index is at a YTD low. Even after last month’s shenanigans, the market is feeling mellow (and possibly too complacent?). |
+ 29.19% | Shares of SpaceX (SPCX) are up by 29.19% so far in August, and now back above the IPO price of $135. |
$5295 | The median monthly rent for an apartment in Manhattan is now $5295. A 1-bedroom flat in the center of Prague goes for about a quarter of that amount. |
SWINGEX INDEX
As of market close on: 14 August 2026
Swingy says: Not sure what the dog days of August is, but we are probably in it. Have a cold one and wait to make a move.
Learn more about how the Swingex Index works here.
WATCHER
Stocks highlighted here each week are not recommendations to buy or sell. They are provided as ideas for swing traders to follow up on with their own research.
TREX (Trex Co.): You could read the name as T-Rex and think it is something… interesting. But, no, Trex is in the outdoor decking and lighting business.
Still, the stock is giving us something interesting to think about. Despite having nothing to do with AI or moon landings or anything cool, TREX got caught up in the stealth selloff during July. The shares were down by 15% a few weeks into the month. And by early August, TREX gained it all back.
The result is the famous cup-and-handle pattern.
An appropriately low-volume handle is probably about finished and so the next step in TREX’s journey is due to begin soon.
A cup-and-handle usually - not always! - resolves by going higher. A traditional interpretation would look for the next stopping point to be in the upper-$50s. However, a close below $48 could be a sign to pull the plug on your trade.