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MACD Divergences
Bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.
Bullish divergence occurs when the indicator is indicating that price should be bottoming and heading higher, yet the actual price action is continuing downward.
These valuable divergences can signal to get out of a long or short position before profits erode. The following chart of the E-mini S&P 500 Index Future shows some of these divergences:
MACD price divergences and confirmations
High #1 to High #2
Looking at the E-mini S&P 500 future, from High #1 to High #2, the futures contract made higher highs, which is usually viewed as bullish. However, the MACD moving average failed to make a new high. This bearish divergence was an early warning sign of things to come with the E-mini S&P 500 futures contract.
Low #1 to Low#2
In yet another bearish sign for the E-mini S&P 500 futures contract, the future made higher lows from Low #1 to Low #2, which again is usually considered positive. Nevertheless, the MACD technical indicator made a clear lower low from Low #1 to Low #2. This bearish divergence warned of the impending downturn of the S&P 500 future and the market as a whole.
Low #2 to Low #3
In addition to bearish and bullish divergences, the MACD can confirm price movement as well. The E-mini S&P 500 futures contract made a substantial lower low which was confirmed by the MACD when it made a lower low as well.
As seen throughout the MACD sections, the MACD is a versatile tool giving clear buy and sell signals and giving warnings of impending price changes.
RSI Divergences
Relative Strength Index
Relative Strength Index Defined
RSI Alternative Buy and Sell Signals and Divergences
An alternative way that the Relative Strength Index (RSI) gives buy and sell signals is given below:
Buy when price and the Relative Strength Index are both rising and the RSI crosses above the 50 Line.
Sell when the price and the RSI are both falling and the RSI crosses below the 50 Line.
An example of this methodology for buying and selling based on 50 Line crosses is given below in the chart of Wal-Mart (WMT):
Relative Strength Index alternative buy and sell signals
For another interesting and under-utilized method for using the RSI indicator for buy and sell signals, see: Stochastic RSI, which combines both the popular Stochastics indicator and the Relative Strength Index.
Relative Strength Index Confirmations & Divergences
A powerful method for using the Relative Strength Index is to confirm price moves and forewarn of potential price reversals through RSI Divergences.
The chart below of the E-mini Nasdaq 100 Futures contract shows the RSI confirming price action and warning of future price reversals:
relative strength index divergences and confirmations
Low #1 to Low #2
The E-mini Nasdaq 100 Futures contract's price made a substantial move from Low #1 to Low #2. The RSI confirmed this move, helping a trader have confidence jumping on board the price move higher.
The break of trendline of the e-mini future was also confirmed by the trendline break of the Relative Strength Index, confirming that the price move was likely over.
Low #3 to Low #4
A bullish divergence was registered between Low #3 and Low #4. The e-mini Nasdaq 100 future made lower lows, but the RSI failed to confirm this price move, only making equal lows. An astute trader would see this RSI divergence and begin taking profits from their shortsells.
High #1 to High #2
A bearish divergence occured when the e-mini futures contract made a higher high and the RSI made a lower high. This bearish divergence warned that prices could be reversing trend shortly. A trader should consider reducing their long position, or even completely selling out of their long position.
The Relative Strength Index is a popular tool for generating buy and sell signals, confirming trends, and warning of impending price reversals.
نوشته اصلی توسط Mehdi1400
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