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Wednesday, September 30, 2009

Divergence - am I coming or going?

When I write about stock market sectors or individual stocks, I generally give an overview of the fundamentals. On the other hand, all the BUY SELL signals we offer at Alert HQ are strictly based on technical analysis.

Whereas the Alert HQ methodology primarily looks for technical indicators that are in agreement in order to generate its signals, there is an important school of thought that says that it is important to note when indicators are not in agreement. This is known as divergence.

More precisely, divergence is when the price of an asset (a stock or ETF, for example) and an indicator, index or other related asset move in opposite directions. An investor looks for those instances where the trends begin to head in opposite directions. This is interpreted as a signal that a turn in the asset price is imminent.

The difference between stock or index prices and MACD is one of the more common divergences that investors watch. Others involves prices and either stochastics, Money Flow Index, RSI, accumulation/distribution or advance/decline.

Sometimes an indicator itself is based on the divergence concept. Moving Average Convergence/Divergence (MACD ) is an example.

Let's see how it works --

The best way to illustrate how divergences work is to look at a chart and walk through some analysis.

Luckily, our friends at Market Club are presenting a new video on the S&P and Divergences.

In this short video, they share with you some divergences that are taking place in the S&P 500 right now. In the course of the analysis they will also show you divergences that didn't work out, what you should look for, and how you should act when a divergence does not work.

So check out the video, it's free and there are no obligations. If divergences weren't on your radar before, it will help you become more aware of when divergences are developing. This can be one more important tool you can use to prepare for turns in the market or in individual stocks.

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