Glen -
Let's see if I can draw an example, very crudely, to clarify my point.
(I hope it shows up correctly on everybody's browser, it does on my Netscape.)
Below, I'll let x's denote price, while the o's are any relevant
indicator (you're right, there can be divergences between price and
several types of indicators, like MACD or RSI).
x
x PRICE
x xxx
xx xxx xx
xxx xx xx
xxx xx
xx xxx
xxx
ooo
oo oo oo
oo oo ooo ooo
oo ooo oooo
oo oo INDICATOR
o
Note in this example that the second low of price was lower, but the
second low of the indicator did not go as low. This is what Elder
calls a class 'A' bullish divergence. It is interpreted as follows:
The bears were able to temporarily push price down to a new low, but
the diverging indicator shows that their power to push price
down is becoming weaker. Chances are that the bears' power will dry
up altogether, and then the bulls will be able to successfully and
substantially reverse the trend.
It doesn't always happen, but often does...
Now, looking at EVI again, the last low of price was lower than the
previous low, and the last low of the MACD was also lower than
the previous low, so they really aren't diverging at all... in fact,
they are in agreement.
Someone a few posts back correctly stated that spotting divergences
can be somewhat subjective. I agree, but IMO Elder's explanation of
class 'A' and class 'B' divergences can help make it a little more
objective...
Loren |
