Share Market Toolbox
When studying price charts, and looking for a potential change in trend, one useful feature to look for in the charts is that which is known as divergence. This refers to the divergence of the price when compared to a chart indicator — that is, when the price is heading in one direction, say up, while the indicator is heading in the other direction, say down.
Divergence comes in two variations — bullish divergence and bearish divergence, and each of these types of divergence can be classified as of three different “strengths” — Class A, Class B, or Class C.
Sample 1 - All Ordinaries index (late 2007)
Take a look at the sample chart in the page header above (click on the image for a larger version). This weekly line chart of the All Ordinaries index (XAO) is now a few years old, but it clearly demonstrates the idea, and there are plenty more samples of divergence in more recent charts. Note the following features in this sample chart:
Divergence - bullish and bearish
The notion of divergence is basically where the price of the index or stock continues to trend in one direction while a chart indicator trends in the other direction.
Bullish divergence -
Basically, this is where the price is making lower lows,
Bearish divergence -
Basically, this is where the price is making higher highs,
Sample 2 - All Ordinaries index (2009)
The second sample here is the weekly chart at right of the All Ordinaries index (XAO) over the period November 2008 to May 2009 (click on the chart for a larger image). This is when the Aussie market bottomed (March 2009).
The bullish divergence shown in this chart clearly shows the underlying strength building in the index, so the chartists were not surprised to see the index rally.
In this sample we can see that the All Ordinaries index (upper pane) made lower lows as it continued it's down trend in late 2008 and early 2009. But at the same time, the RSI indicator did not make lower lows - in fact it was making higher lows which is bullish divergence.
Sample 3 - Telstra bullish divergence
The third sample is the weekly candlestick chart of Telstra (TLS) at right showing Telstra shares in a downtrend (the upper pane) making lower lows in 2006, while the MACD indicator (lower pane) made a higher low. This is bullish divergence, indicating underlying strength building in the share price.
The stock went on to increase 36 percent in the following five months.
By the way - also note that the MACD indicator was rising below it's zero line during the period of divergence - another indication of underlying strength building.
Which chart indicators?
The observation of divergence is apparent on a number of technical analysis chart indicators - but which ones? Several are listed with sample charts in Brainy's eBook Article TA-5210 "Divergence" (available to Toolbox Members).
Divergence Class A, B or C?
More details...For more information about breakouts, and more samples from which to learn,
refer to the eBook Articles in the Share Market Toolbox - see the links at top right.
TerminologyAny special terms that might be used in the text at left, can probably be found discussed in the Toolbox somewhere. Perhaps in Brainy's eBook Articles - see the Master Index list for details. Or, search the eBook Articles.
The Share Market - more information about the market and investing and trading.
The toolbox is an arsenal of weapons to help you tackle the share market.
See a list of contents on
the Toolbox Gateway page.
Robert Brain provides support to both new and experienced traders and investors.
Who is Robert Brain?
And whatever you do,
beware of the sharks in the ocean!
The information presented herein
opinions of the web page content owner, and
Copyright 2013-2015, R.B.Brain -
Consulting (ABN: 52 791 744 975).