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** Quick Chart Lesson: Positive Divergence **

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ClayTrader Member Level  Friday, 08/10/07 10:30:49 PM
Re: None
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** Quick Chart Lesson: Positive Divergence **

The power of positive divergences can be very beneficial, when you keep an open eye for them.

What is a positive divergence? Positive divergences occur when the price is either consolidating or slowly drifting downwards, BUT an indicator is trending UP (the opposite is the case for a negative divergence)...

Point 1 on the chart below represents the beginning of the divergence. For approximately a month, the price traded within a consistent channel represented by the blue box (except a few days where the price dropped "outside" the box, but never closed beyond the box).

During this channel trading, notice how Points 2,3,4 are all higher than each other; hence, giving you an up trending line. The price is not up trending though, it is merely trading sideways in a channel... BOO-YA! You got yourself a positive divergence...

A "reinforcer" to this is the bullish double bottom formed during the channeling. A bullish double bottom simply means that the newest bottom is higher than the previous bottom (in the chart you will see Bottom 1 is LOWER than Bottom 2, which creates a bullish formation).

There are 3 possible areas for entry; however, if anyone would tell me they got in at Area 1, I'd call them a liar lol...

Area 1: The formation of Bottom 1 (around $49)... this would have given you a profit of around $7 a share.

Area 2: The formation of Bottom 2 (around $50-51). This personally would be too risky for me, but with a positive divergence occurring AND THEN the formation of a double bottom, the traders with higher risky tolerances may find this entry appealing.

Area 3: The breakout of the channel (red circle). This is the safest place to enter (where the odds are in your favor the most). Playing it safe would still have given you a profit of around $3 a share within the next couple weeks... nothing I would ever complain about.

This is a longer term positive divergence, but they can happen "quickly" too... whenever you come across one, I am not saying to jump in right away, but what I AM saying is to put it on your radar/watchlist... big money can be made from these when traded properly and staying disciplined...

Any questions or suggestions for other lessons? Please let me know...

Need an Annotated Chart? Stop by my board --
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