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Why daily divergences aren’t rare enough

May 28, 2012

28 May

In my methods section, I show the criteria for RSI divergence trades. I look for weekly rather than daily divergences, as these are rarer, more reliable and can mark long term turning points.

Nevertheless, daily divergences are worth paying attention to, more as a reason to take profit (see AEM v XAU earlier today) and as a reason to hold off from entering a position until that divergence unwinds.

There are a lot of bullish daily RSI divergences now, which means the market may rally in the short term.

iShares Emerging Markets (EEM)

Eem_280512

The RSI buy signal is given by the move above the intervening RSI high from 21 May.

Euro v U.S. Dollar

Eurusd_280512

Likewise.

The example below from August 2010 on the same series shows why daily divergences are not good enough for trade entry.

Eurusd_dailyearlier_280512

The divergence is formed on 06 August 2010 and the price unwinds from overbought, consolidates for one month and goes higher.

Weekly chart

Eurusd_weekly_280512

The 14 week RSI was mid range when the daily divergence was formed, leaving plenty of scope to go higher once the short term overbought condition was relieved.

I could show hundreds of these examples, the point is:

Weekly RSI divergences are rarer, more reliable and more likely to mark long term turning points than daily divergences.

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