Divergence

Divergence is ithe key concept to learn when dealing with supporting studies and indicators. It occurs when the relative trends of prices and of studies are moving in different directions and can be applied to momentum indicators, volume, breadth indicators, and even sector analysis. Divergence can be bullish or bearish, depending on the relative directions of the price and studies. Typically, divergences are resolved when the price moves in the direction of the study.

The relative strength index (RSI) is one of the more popular measures of price momentum.[*] In Figure 13.2, the U.S. dollar index was trending lower in late 2003 and its RSI dipped below 20, a reading that marks an oversold, or overextended, market. In February 2004, ...

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