Why daily divergences aren’t rare enough

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)

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

Euro v U.S. Dollar

Likewise.

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

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

Weekly chart

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.