Divergences are a rare breed in the technical world. Because they occur so rarely, these signals retain a high value. Many investors, including myself, plot the Relative Price Strength (RSI) against price. Additionally, you could look at a few others, but for the time being, we will focus on the RSI.

One important thing to note is that in most cases, probably 99% of the time, the trending price of the stock will mirror that of the indicator (RSI). Divergences are characterized as price and indicator doing the exact opposite. Suddenly, price and its indicator veer off, or diverge, in different directions.

Essentially there are two kinds of divergences, bullish and bearish. A bullish divergence occurs when the price of the stock has been trending down, yet a specific technical indicator has been gaining momentum and trending up. Eventually the price of the stock must follow that of the indicator.

On the other hand, a bearish divergence occurs when the price of the stock has been trending upward, between two specific points, while the indicator continues to decline.
It’s not enough to simply look at two lines wandering apart in the short term to label it a divergence. You will need two locate two points that line up on both the stock and the indicator. From those two points, you could construct a line. In the examples I give below, you will see how this process works.

It was just a day ago when I discovered two bearish divergences occurring simultaneously between the RSI and price on both Apple and Google’s charts. After an impressive run, these two plays are losing buying momentum and are at the end of the road.

Many of my readers have pocketed big gains on equity and option plays like the ones I have described above. If you are interested in knowing exactly when to get in and out of a stock, then I would encourage you to check out my service, Volume Spike Alert.

Good investing,

Stephen Oakes
Editor, Volume Spike Alert
www.volumespikealert.com