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Strategies & Market Trends : Technical Analysis - Beginners -- Ignore unavailable to you. Want to Upgrade?

To: The Perfect Hedge who wrote (7840)	1/17/1998 1:42:00 AM
From: Loren	Read Replies (1) \| Respond to of 12039

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