thechartpatterntrader
New member
8/21 Commentary: The RSI (the Relative Strength Index) on most of the indices appears to be forming simple positive divergence. Now I want to be clear what that means. First, it is impossible to form positive divergence unless you are in a down trend. Most investors believe simple positive divergence forms right before a uptrend begins. This is not true. Positive divergence occurs when prices have been declining for a period of time and the bears simply exhaust themselfs. When positive divergence forms it is letting you know that the previous decline has moved to rapidly and prices will need time to consolidate the move. Once the consolidation phase has completed the previous dominant trend will resume downward.
What does positive divergence mean then? Contrary to what most investors believe, simple positive divergence signals that prices are about to stage a recovery, forming a contra-trend. This contra-trend will retrace up to 50 percent of the losses in the previous decline. If retracements are deeper than 50 percent and continue to rise to say the 61.8 Fibonacci retracement, it could jeopardize the downtrend altogether.
Now we know that Downtrends produce RSI readings between 20 and up to 66, and uptrends manifest values between 40 and 80. So until we have a decisive move above 66 moving above the value of 70, the downtrend should prevail. So you have to ask yourself, if you know we are in a downtrend, shouldn't you be looking for a place to get (long-term) short once the contra-trend is completed? Rather than looking to get long because positive divergence has appeared. Now don't misunderstand, I do believe a contra-trend rally will eventually take place, but if the rally stalls below the RSI reading of 66, wouldn't it be wise to have a game play in action.
I have no reason to believe the worst is behind us and that the trend will change, until I see proof that this has only been a 10-12 % corrrection. Now I'm not a fortune teller and I don't know the future, but Technical Analysis has called this selloff so far. But remember we must be flexible knowing trends do change from time to time. So if a new trend does form I will trade with the trend.
I did a video about the RSI on the S&P 500 chart, which is the C fund date 8-21-07, posted on the link below. I hope it helps you TSP brothers and sisters.
http://thechartpatterntrader.blogspot.com/
The Chart Pattern Trader
What does positive divergence mean then? Contrary to what most investors believe, simple positive divergence signals that prices are about to stage a recovery, forming a contra-trend. This contra-trend will retrace up to 50 percent of the losses in the previous decline. If retracements are deeper than 50 percent and continue to rise to say the 61.8 Fibonacci retracement, it could jeopardize the downtrend altogether.
Now we know that Downtrends produce RSI readings between 20 and up to 66, and uptrends manifest values between 40 and 80. So until we have a decisive move above 66 moving above the value of 70, the downtrend should prevail. So you have to ask yourself, if you know we are in a downtrend, shouldn't you be looking for a place to get (long-term) short once the contra-trend is completed? Rather than looking to get long because positive divergence has appeared. Now don't misunderstand, I do believe a contra-trend rally will eventually take place, but if the rally stalls below the RSI reading of 66, wouldn't it be wise to have a game play in action.
I have no reason to believe the worst is behind us and that the trend will change, until I see proof that this has only been a 10-12 % corrrection. Now I'm not a fortune teller and I don't know the future, but Technical Analysis has called this selloff so far. But remember we must be flexible knowing trends do change from time to time. So if a new trend does form I will trade with the trend.
I did a video about the RSI on the S&P 500 chart, which is the C fund date 8-21-07, posted on the link below. I hope it helps you TSP brothers and sisters.
http://thechartpatterntrader.blogspot.com/
The Chart Pattern Trader
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