Registered User
Joined: 10/22/2005
Posts: 1
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Can you explain what you mean by "leading divergence", as in the note for 12/27 for BP? What is the MS diverging with? Regarding the TSV, can you explain what is meant by "divergent at the top"
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Registered User
Joined: 12/19/2004
Posts: 457
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Indicators are compared to price most of the time.
There are some techniques that compare indicators on a short time frame with an indicator on a longer span.
When you are looking for a divergence, you are looking for extremes of price movement. You are trying to match tops in price with tops in the indicator in an uptrend, and lows in price with lows in the indicator in a downtrend.
Remember the primary definition of an uptrend--a series of higher highs, and higher lows.
A downtrend is opposite--a series of lower highs and lower lows.
A in order to spot a divergence, you need at least 4 data points.
--two points for price
--two points for the momentum indicator.
Pull up a chart of the SP-500, and switch to weekly.
Plot a 5 period Price rate of Change, or a 5 period TSV.
Note that between 12/04 and 3/05, price made an ever so slightly higher high.
Now look at TSV. At the 12/04 high, TSV did not make a new high. A failure to make a new high when price does is a type of divergence.
Now, compare TSV around the 12/04 high, and TSV around the 3/05 high. You will see that the SP made a new high (above the 12/04 high) but TSV was LOWER than it was at 12/04. The SP had a series of higher tops, but TSV had a series of lower ones. That is a NEGATIVE or BEARISH divergence, and suggests weakness.
Next, go back to the SP chart, and set it up so that you can only see data to 1/7/05. Put the pointer on that day and hit the backslash.
On the weekly, throughout 2004, you will see the SP make a series of lower lows, but either the 5 period rate of change, or the 5 period TSV was making a series of higher lows.
Note especially the relationship between the 5/04 low, and the 8/04 low, and how the indicators looked.
That was a POSITIVE or BULLISH divergence, and suggested downside momentum was weakening.
I hope this helps.
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