12-28-2006, 01:40 PM
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Administrator
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Join Date: Sep 2005
Posts: 15,979
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Some information about divergence which I found in book: "Achelis, Technical Analysis from A to Z".
Divergences.
Quote:
A divergence occurs when the trend of a security's price
doesn't agree with the trend of an indicator.
Many of the examples in subsequent chapters (see page )
demonstrate divergences.
The chart in Figure 34 shows a divergence between Whirlpool
and its 14-day CCI (Commodity Channel Index). [See page .]
Whirlpool's prices were making new highs while the CCI
was failing to make new highs. When divergences occur,
prices usually change direction to confirm the trend
of the indicator as shown in Figure 34. This occurs
because indicators are better at gauging price trends
than the prices themselves.
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MACD.
Quote:
A indication that an end to the current trend may be
near occurs when the MACD diverges from the security.
A bearish divergence occurs when the MACD is making
new lows while prices fail to reach new lows. A bullish
divergence occurs when the MACD is making new highs
while prices fail to reach new highs. Both of these
divergences are most significant when they occur
at relatively overbought/oversold levels.
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Money Flow Index.
Quote:
Look for divergence between the indicator and the price action.
If the price trends higher and the MFI trends lower (or vice versa),
a reversal may be imminent.
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Accumulation/Distribution.
Quote:
Divergences between the Accumulation/Distribution and
the security's price imply a change is imminent.
When a divergence does occur, prices usually change
to confirm the Accumulation/Distribution. For example,
if the indicator is moving up and the security's price is
going down, prices will probably reverse.
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ATR.
Quote:
The Average True Range ("ATR") is a measure of volatility.
The Average True Range can be interpreted using
the same techniques that are used with the other
volatility indicators. Refer to the discussion on
Standard Deviation for additional information on
volatility interpretation.
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CCI .
Quote:
(was developed by Donald Lambert)
A divergence occurs when the security's prices are
making new highs while the CCI is failing to surpass its
previous highs. This classic divergence is usually
followed by a correction in the security's price.
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Momentum.
Quote:
The interpretation of the Momentum indicator is
identical to the interpretation of the Price ROC.
Both indicators display the rate-of-change of a security's price.
However, the Price ROC indicator displays
the rate-of-change as a percentage whereas
the Momentum indicator displays the rate-of-change as a ratio.
As a market peaks, the Momentum indicator will climb sharply
and then fall off-- diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom,
Momentum will drop sharply and then begin to climb
well ahead of prices. Both of these situations result in
divergences between the indicator and prices.
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Relative Strength Index.
Quote:
The Relative Strength Index ("RSI") is a popular oscillator.
It was first introduced by Welles Wilder in an article in
Commodities (now known as Futures) Magazine in June, 1978.
Step-by-step instructions on calculating and interpreting
the RSI are also provided in Mr. Wilder's book, New Concepts in Technical Trading Systems.
The RSI is a price-following oscillator that ranges
between 0 and 100. A popular method of analyzing
the RSI is to look for a divergence in which the security is
making a new high, but the RSI is failing to surpass its previous high.
This divergence is an indication of an impending reversal.
When the RSI then turns down and falls below
its most recent trough, it is said to have completed
a "failure swing." The failure swing is considered
a confirmation of the impending reversal.
As discussed above, divergences occur when
the price makes a new high (or low) that is not confirmed
by a new high (or low) in the RSI. Prices usually correct
and move in the direction of the RSI.
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Stochastic Oscillator.
Quote:
Sto.chas.tic (sto kas'tik) adj. 2. Math. designating a process
having an infinite progression of jointly distributed random variables.
Look for divergences. For example, where prices are making
a series of new highs and the Stochastic Oscillator is failing
to surpass its previous highs.
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TRIX.
Quote:
TRIX is a momentum indicator that displays the percent
rate-of-change of a triple exponentially smoothed
moving average of the security's closing price.
Divergences between the security and the TRIX can
also help identify turning points.
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