How to Determine Bullish Divergence by Relative Strength Index (RSI)

One popular use of the RSI is to determine divergence. Divergence is a compelling tool that can discover looming market reversals, by comparing RSI value and shares’ price movements. 

When you trade ETF, if the trending momentum (which is justified by RSI) does not bolster the price, an implied reversal might be in sight.  Basically divergence can be classified as two different types of divergence: one is bullish divergence, the other one is bearish divergence.

          Bullish divergence takes place when a share’s price reaches a new low, but the RSI does not follow the footsteps. 

Chart 1: Bullish Divergence for SSO from 7/1/2011 to 3/31/2012.

Source: Line Graph Outline form StockCharts.com.  Actual data compiled by Authors.

The ETF SSO (ProShares Ultra S&P 500), pursues daily investment results that resemble two times the daily performance of the S&P 500 index. It reached the low of that cycle at 37.56 on 8/10/2011.  Chart 1 shows that, on 10/3/2011, it touched another cycle low at 35.82, which was lower low, but the RSI (5) was 29, holding above a prior low of 23 on 8/10/2011. The bullish divergence formed between August and October 2011, and SSO went up steadily from the bottom on 10/3/2011. The breakout in November endorsed this reversal momentum.

When a bullish divergence is detected, even if the underlying security is in a declining mode, the sell-off is in check. Bearish momentum is controlled. Thus, the market condition does not deteriorate further, and the fear does not spread to a greater extent. It would be a good time to accumulate shares and wait to grow your profit.

Credited to http://www.investopedia.com/terms/d/divergence.asp

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_index_rsi

         Thanks for your visiting and reading.

      

         If you want to read more about Relative Strength Index (RSI), you can visit:

http://top5indicators.blogspot.com/2013/09/how-to-choose-look-back-periods-for-rsi_12.html

http://top5indicators.blogspot.com/2013/09/how-to-combine-ise-sentiment-index-and.html

http://top5indicators.blogspot.com/2013/09/how-to-determine-bullish-divergence-by.html

http://top5indicators.blogspot.com/2013/09/how-to-determine-market-breakouts-by.html

http://top5indicators.blogspot.com/2013/09/how-to-determine-negative-divergence-by.html

http://top5indicators.blogspot.com/2013/09/how-to-profit-from-stock-market-by_17.html

         Have a great day!