Thursday, July 05, 2007

Google Forming a Negative Divergence

While GOOGLE (GOOG) made my long position trading watchlist (entry at 50 day moving average), I could not help but notice the startling RSI, OBV and stochastic divergences that have formed at the current new highs.

For those who don't know, a negative divergence forms when price increases while the indicators decrease. As you can see from the chart below, that is precisely what is happening to Google.

While it is tempting to short a stock at the moment a divergence is spotted, only aggressive traders willing to take on high risk or use a very tight stop should go short now. The more prudent way to play this divergence is to wait for the stock to break below the old high before going short. Here we would short on a break below $535, with a stop above the old high and a target near the 50 day moving average, approximately $520.

While the stock is on my very short term "short" watchlist, it is also on my longer term postion trading "long" watchlist. I would enter long on a pullback to the 50 day moving average. In an ideal world, I'd be able to short down to the moving average, then reverse and go long.


tellzhang said...

thanks for the post and teach me so many things, good work!


tellzhang said...

According from your 'Negative Divergence', isn't RIO in this condition now with RSI down as well as Total on balance is down?

many thanks!


The Market Speculator said...

Thanks for the kind words, Tony.

Divergence in RIO is slight, and MACD histogram is actually turning up. When looking for a divergence, you don't want to have to "squint" to see it.

tellzhang said...

Thanks for the reply. yes, the MACD just up for bullish signal. It seems so hard to find a right stock in the right sector at this momnet, so I stay in cash position...

I am inspired by your "Trading goal" and enjoy reading your previous posts and Youtube videos...great job!!!

I notice you are using as well as telechart, what else tools are you using?