Don't Ignore This Chart!

How To Spot A Positive Divergence

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In evaluating whether a positive (or negative) divergence exists on a chart, you must remember to use closing prices.  If you use candlesticks like I do, it's not always easy to spot divergences.  I'll give you an example - Baidu (BIDU).  On the chart below, the top portion is a candlestick chart and the bottom portion is a line chart.  Evaluating divergences is one of the few times a line chart is preferred.  Take a look:

On the candlestick chart, the huge gap lower and long tail to the downside produces "noise" on the chart and you may try to connect those lows with the lows made the following month.  If you do, you'd incorrectly determine that prices have not moved lower and therefore you cannot have a positive divergence.  However, the line chart - which only uses closing prices - clearly shows that we've seen lower lows in price.  That, combined with a higher MACD produces the positive divergence, which is a sign that selling momentum is slowing.  Always remember that hollow candlesticks have closes at the TOP of the rectangle.  Opens are at the bottom.  The "tails" or "wicks" mark the intraday high and low.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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