Investment Thesis

Mega Cap Stocks Mean Reversion and Momentum Exit

This thesis outlines a quantitative trading strategy focusing on mega-cap stocks with the objective of capitalizing on short-term oversold conditions and subsequent mean-reversion potential. By leveraging the Relative Strength Index (RSI) and the 200-period Simple Moving Average (SMA) on a 15-minute timeframe, the strategy identifies high-probability entry points and exits based on momentum signals or key technical levels.

Strategy Overview

Universe of Stocks:

  • Restrict trading to mega-cap stocks due to their high liquidity, stable price action, and strong correlation to technical indicators.

Entry Conditions:

  • RSI Condition: The stock's RSI (15-minute chart) falls below 30, signaling oversold conditions.
  • Price Condition: The stock's price is below the 200-period SMA, suggesting a bearish trend and potential undervaluation in the short term.
  • Both conditions must be met after the market opens to qualify for an entry.

Execution:

  • Once the conditions are met, the algorithm initiates a long position in the identified stock.

Exit Conditions:

  • The position is closed when either:
    • The price exceeds the previous day's high, indicating the stock has regained upward momentum.
    • The RSI rises above 80, signaling overbought conditions and a potential exhaustion of the recovery rally.

Thesis Rationale

Oversold Mean Reversion:

  • The RSI below 30 condition identifies short-term oversold states, where price often deviates significantly from its mean due to excessive selling pressure.
  • The price being below the 200 SMA adds a filter for structural bearishness, allowing the strategy to capture reversals from deeply oversold levels.

Defined Exit Points:

  • Exiting after the previous day’s high is surpassed allows the strategy to capture the full extent of a short-term recovery rally.
  • Alternatively, the RSI above 80 ensures the position is closed as the stock reaches an overbought state, avoiding potential reversals.

Risk Management and Efficiency:

  • By targeting mega-cap stocks, the strategy minimizes liquidity risks and benefits from stable technical behavior.
  • The dual-exit condition ensures adaptability to different recovery scenarios.

Expected Benefits

  • Captures high-probability mean-reversion setups in liquid, predictable stocks.
  • Uses RSI and SMA filters to ensure trades are entered only during extreme conditions.
  • Provides clear exit criteria that balance profit-taking with risk management.

Potential Risks

  • False signals in trending markets where oversold conditions fail to revert.
  • Gaps in price movement that could impact stop-loss execution.

 

This strategy seeks to offer a systematic approach to intraday trading by blending technical analysis with a disciplined execution framework, targeting consistent performance from a well-defined set of trading rules.