DivergenceStockCharts.com Definition
A situation that occurs when two lines on a chart move in opposite directions vertically. People often look for divergences by comparing a stock’s direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two kinds of divergences: positive and negative. A positive divergence occurs when the indicator moves higher while the stock is declining. A negative divergence occurs when the indicator moves lower while the stock is rising.
I’m going to use this term in the same way most people understand divergence, to demonstrate the definition accumulation and distribution as we’ve discussed thus far. A good example will be yesterday’s action on the ES. I found it amusing to hear many people were ready to short the market hard. So sorry. So sad. Some people used the news and government has made trading the market hard. I agree with them but not in the same way. If you truly understand technicals, you will not subscribe to trading the news. Don’t get me wrong. News has its place on how the market moves, but to trade relying on it as it breaks, is like voodoo.
If you truly understand technicals, you should know that the technicals have to provide the means to allow the pops and drops that occur when the news is made public. And that means, market must accumulate or distribute prior to the public release of the news. Is there a private release of the news. Hmmm….
StockCharts.com says “…situation that occurs when two lines on a chart move in opposite directions vertically”. There are 2 lines in the Stochastic and MACD.
Positive Divergence
On this chart, you will notice the macd and stochastics are in their positive divergence cycle. The 2 lines of each oscillator are apart from each other. Ergo Divergence. Where the fast runs opposite the slow. In this case the fast is above the slow, therefore the oscillators are said to be in positive divergence cycle.
Negative Divergence
On this chart, you will notice the macd and stochastics are in their negative divergence cycle. The 2 line of each oscillators are opposite of each other. Where the fast is below the slow, this is known as negative divergence cycle. So far pretty text book right?
StockCharts.com also goes on to say “…positive divergence occurs when the indicator moves higher while the stock is declining.”
How many of you were sure the market would finally correct hard? So sad to see the funnymental bears were so painfully served yesterday. The price action of the ES re-tested the previous low on an escalating MACD. This is known to us as accumulation. StockCharts.com and the entire technical community knows this as positive divergence..
StockCharts.com also goes on to say “…negative divergence occurs when the indicator moves lower while the stock is rising”.
Were you caught going long at the top with this? Market kept going higher and higher. The funnymental bulls thought this is where we breach the previous high and zoom to 1200 on the ES. Higher highs on lower and lower macd is text book definition of negative divergence. Head and Shoulders pattern is known as a distribution pattern. Imagine that.
Some funnymentalist who figure they are smart and maybe so in their own right, would say, “well this is all after the fact”…”hindsight is 20×20″…BLAH BLAH BLAH BLAH BLAH! You’ve just been equipped with some technicals, see if you can gauge it as defined while the market is in play. Its in the chart!