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Health sector has RSI and breadth divergence

February 18, 2013

18 February

Divergences between price and an indicator often mark extremes. I look for weekly RSI divergences and separately, for breadth divergences. When these coincide, that strengthens the case for a reversal.

SPDR Health (XLV): Breadth divergence

XLV and %age of component stocks above their 100 day average

Xlv_breadth_100_180213

There is a decent record of breadth divergences marking extremes over the last 10 years.

  • A lower breadth high formed at the February 2004 high, leading to a price low in October 2004
  • A lower breadth high formed in June 2007. There was a retest in December 2007 (price fractionally lower, breadth much lower)
  • A higher breadth low formed in March 2009 at the low
  • Breadth divergence formed in January 2010 at the high. The April 2010 retest had lower breadth still

Now..

  • Breadth peaked in April 2012. A price high formed in October 2012 on a divergence
  • The latest price high has breadth divergence against the October high 

SPDR Health (XLV): RSI divergence

Xlv_weekly_rsi_180213

  • XLV has a weekly RSI divergence
  • There is no MACD divergence, which would be ideal

Daily chart

Xlv_candles_180213

  • The first divergence (above 70) came on 01 February, which failed to hold the advance
  • Another divergence has formed (below 70 this time), meeting my RSI divergence criteria

Entry criteria

The entry signal is a weekly RSI close below the intervening low but at times, a weekly reversal bar can be taken. Now is a time to make that exception. With the intervening RSI low at 51 from mid November, a large move is required, spoiling the risk:reward of the trade.

A weekly reversal bar is a Friday close below last week’s low of $43.09. Then, a short position will be taken with a stop loss above the high ($43.45).

Mining sector recap

In October, I showed a hindsight example of the above using the mining sector.

SPDR Metals & Mining (XME)

Xme_candles_180213

  • The price low from the July breadth divergence has held for now but the rally has been modest
  • The breadth indicator has unwound from oversold
  • Many components have crossed their falling 200 day moving average through the passing of time, just like XME

 

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