Tuesday, November 11, 2014

What You Must Know About This Market: Negative Divergence

No matter what the time frame, all swing traders are interested in trends.  Often the "eye test" of a chart does not capture the underlying strength of a trend.  For that reason, we monitor RSI near highs.  If RSI is not making a high while an index or stock is, that is what I call a negative RSI Momentum Divergence.

Take a look at the current QQQ chart.  Notice that it is basing near highs while RSI has failed to make a new high.  While this is not yet a short setup, it is a clue that momentum is slowing and a pullback is in order.  A close below the old high makes this a failed breakout and possible short setup.

To get a better understanding of the failed breakout trade, watch this video of a resent successful short trade.

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