On Wednesday, I wrote:

“SPY’s RSI(2) on the daily chart closed at 15.37 on Tuesday. The last time it dropped that low was on February 4th, and a swing low formed the next day. The bears may not be done mauling the market yet, but the odds have begun to shift back toward the bulls.”

And that’s pretty much what happened. The bears gave the market a vicious mauling on Friday morning, but the over-sold market bounced back. Take a look at this daily SPX chart which has an RSI(2) plot at the bottom (click to enlarge):

The two purple arrows point to the RSI(2)’s plunges in February, and the two blue arrows point to the dramatic reversals that occurred shortly afterward. Those two hammer candles are almost identical. Not bad, huh?

No indicator is a sure thing, but when the RSI(2) gets streched, it pays to be alert for a reversal. Especially in a range-bound market where indicators like this one shine.

Hat-tip to George for telling us about the RSI(2) way back when.