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Bullish daily RSI divergences form on short trades

November 18, 2013

I have shown on many occasions that divergences on the 14 day RSI can be a good reason to remove a position, although they are insufficient to warrant opening a position.

Recently, I opened a short position in Hormel Foods (HRL) v SPDR Consumer Staples (XLP). This showed a bullish divergence on its 14 day RSI on 12 November. The ratio rallied the rest of last week.

HRLXLP DAILY

The stop loss on this position is moved to break even. Longer term, there was a bearish divergence on the 14 week RSI and Performance Rank, which prompted the short position.

Weekly chart

HRLXLP WEEKLY
That long term divergence may still take effect and bring further underperformance of its sector for Hormel Foods, I just don’t want a profitable trade becoming a loss even in the short term, hence the move of the stop loss. If stopped out, the pair could still be shorted on a reassertion down but that may not fit one of my defined trade set ups.

International Flavors & Fragrances (IFF)

On 28 October, I showed the bullish daily divergence on IFF versus SPDR Materials (XLB) and gave it as a reason to take some profit. Well, look what happened since then!

Daily chart

IFFXLB DAILY
Half of the position has a 4.7% profit and the other half was stopped out at break even.

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