In the last article I talked about how to use bullish divergences to time an entry into a new long position or to look out for weakness in a downward trend but there are also bearish divergences that long traders need to watch for.īesides describing a bearish divergence I will further refine divergence analysis, in this article, to help you understand what types of divergences matter most and what you should be looking for on a day to day basis. When this happens it indicates that investor sentiment is too extreme and a reversal to the upside is likely.ĭivergences can happen to trigger trades both directions.ĭivergences can be an important warning signal that a bullish trend is ending. The disagreement or divergence between bearish price action (lower lows) and the trend of the oscillator (higher lows) is one way to answer that question. Oscillators are typically designed to show a trader when prices have reached extremes and a reversal is likely. Traders use technical indicators like oscillators because they filter a lot of the noise within the price action. In the video I will cover another great example of a bullish divergence like the one on the QQQQ but on an individual stock. However, the RSI technical indicator I have applied is showing a series of higher lows, which is indicative of an improving trend.įor QQQQ shorts, this is a warning that risk control is going to become much more important because there is a high probability that the trend will be disrupted in the short term.įor more speculative traders looking to get long the QQQQ or buy calls, this “bullish divergence” is an alert that a change in the trend may be emerging. This is representative of a market that is becoming more bearish. For example, in the chart below you can see the QQQQ forming lower lows from January through March of 2008. A divergence appears when a technical indicator (usually an oscillator) begins to establish a trend that disagrees with the actual price movement.
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