Divergence
Tuesday, August 8, 2006 at 06:20PM
Ever hear of this before? Divergence takes place when the price of a stock and a technical indicator move in opposite directions. This confirms a significant shift in price movements. Divergence can actually be positive or negative. For example, positive divergence occurs when the price of a stock makes new lows, while the indicator makes new highs. Negative divergence occurs when the price of a stock makes new highs, while the indicator makes new lows. A trader can find this situation very useful to see where a trend is likely to reverse. Here is an example to help illustrate negative divergence as a potential trading signal. Take a look at TSO.
Notice as the stock makes new highs, the technical indicator we are using is making lower highs. It basically fails to confirm the stocks uptrend. This confirms weakness in the trend despite the fact that it is moving higher. Once the trendline is violated, one would take a trade in anticipation of a trend reversal.
I felt like leaving the office on an educational note. Everyone have a great night, I will see you back here tomorrow!!!
Reader Comments (2)
We are so thrilled to have found your Blog Site!!! My wife and I would have been here sooner if we had only known.
We have really enjoyed your teaching on the Wednesday night Investools - Investor Talk!!! Awesome information from what I would deem an extremely talented instructor.
Please count my wife and I in as regulars to your Blog site. We are fairly new to trading - Joined Investools last May as a PHD students.
We are consuming this with every once of attention and dedication. We are actually making real money now trading Options and know that you have played a huge role in motivating us and training us.
Once again thank you for your time and for having the "Heart" of a teacher!!!
"It does no good to have knowledge if you do not pass it along."
Sincerely,
Randy B.
AKA: Old Soldier