Trading Systems  |  FEB 2008

Trading Medium-Term Divergences by Sylvain Vervoort

Trading Medium-Term Divergences by Sylvain Vervoort Detect medium-term divergences by using the zero-lagging exponential moving average, support and resistance lines, and trendlines. When a stock price and an oscillator move in the same direction it’s known as a convergence. When price and oscillator move in opposite directions, it’s known as a divergence. In looking at the lows of the oscillator and comparing them with the lows in price, we can define three different situations (see Figure 1): ■ When the price and oscillator make higher or equal bottoms, they converge. Until there is no other indication, the most probable price move is a continuation of the uptrend. ■ When the oscillator creates a higher bottom while the price makes a lower bottom, they diverge. This is mostly found at the end of a downtrend, indicating an uptrend reversal. ■ When the oscillator has a lower bottom while the price sets a higher bottom, they diverge. This is mostly found in a price uptrend after a price correction, indicating a continuation of the uptrend.

by Sylvain Vervoort