How to spot a divergence? RSI and MACD indicators.
Before delving into the operation with extreme zones and the different options that will be presented to us, we must mention two technical indicators that will help us detect divergent zones in the price:
RSI (Relative Strenght Index)
It is a momentum indicator that is used to measure overbought and oversold zones. It is also used in acceleration and divergences. The RSI moves between values ​​from 0 to 100, with 70 or more being overbought and 30 or less being oversold.
Well, what does overbought and oversold mean?
Overbought: indicates that the price does not have accumulated relative strength. The price has risen sharply and the move is likely to weaken. Oversold: indicates that the price has accumulated relative strength. In this case, a sharp drop in price is observed.
MACD (Moving Average Convergence Divergence)
This indicator is included in the group of trend indicators and we can use it to generate buy and sell signals, divergent signals in ceilings and floors, as a trend indicator to measure and assess it and to measure the phases of the trend.
We will use it to detect if we are in an impulsive phase or a corrective phase of the price.
It will also help us:
It will indicate a buy signal in an uptrend and a sell signal in a downtrend Phase measurement in the trend : In an uptrend, an upward cross indicates an impulsive phase It will help to detect divergences in floors and ceilings à indicates price slowdown.
What are Divergences?
Normally an indicator will behave exactly the same as a price curve, but there are moments in the market in which the price and indicator make different movements.
This fact is known as DIVERGENCE.
And what types of divergences exist?
Fundamentally they may be bullish or bearish Divergences, and within them, of different types:
Type A Divergences: The price hits new highs/lows and the indicator NO.
Type B Divergences: The price equals the highs/lows and the indicator does NOT, or the price reaches new highs/lows and the indicator equals them.
Triple Divergences: Up to 3 new consecutive minimums/maximums are produced. They normally appear in the formation of WEDGES. They are known as Terminal Guidelines.
When does a Divergence start?
We must take into account the indicators that we have talked about previously, the RSI and the MACD, since they are the ones that will give us the key clues to detect the beginnings of the divergences, and later to be able to operate them.
There will be an upward or downward crossover of the MACD, contrary to the trend.
A divergence will occur when the RSI pierces upwards or downwards the guideline that we draw from the last relevant, maximum or minimum levels.
For this, it is necessary that:
previously the RSI has been in the overbought or oversold zone. there is divergence in the last relevant high/low The rupture of the guideline occurs.
We can rely on the Divergences indicator, where it will detect divergent areas in red.
We have talked about Extreme Zones, which we can detect with indicators such as Pivot Points.
But, how do the Pivot Point influence the divergences?
Zones R2 – R3: They act as resistance zones and we apply bearish countertrend operations. Market CEILING Extreme Zone Zones R2 – S2: They act as neutral zones and we apply trend operations . Zones S2 – S3: They act as support zones and we apply bullish countertrend operations. Extreme Zone of market SOIL.
Regarding divergences, in this case we are going to seek to operate in combination with Pivot Point levels.
For this, we will need the price to be in the extreme zone, at least S2 or R2, and for there to be a divergence confirmed by RSI and MACD indicators.
Looking to trade shorts at R2 or R3 levels when bearish divergences appear in an uptrend. Looking to trade longs at S2 or S3 levels when bullish divergences appear in a downtrend.