Divergence Analysis
9.7.1.5 examples of relative performance Divergence This is another type
of divergence that is based on the percentage performance of two data series over
the same period of observation. It is a relative measure because:■ (^) The performances are measured as a ratio or percentage rather than as a
spread based on absolute price or index point differences
■ (^) The most recent percentage performance depends on the initial point of refer-
ence or comparison over a specified period (i.e., the performance at each point
is compared to the price or index level at the start of the observed period and
is measured as a percentage of this initial price or index level)
In Figure 9.101, the Housing Index is making lower peaks in terms of percent-
age performance while the SPY ETF is making higher peaks, where the period
of comparison extends from June 1, 2010, to March 13, 2013. In this example,
the Housing Index is assuming the role of supporting data series and is therefore
indicating future bearishness in the broad market, represented in this example
by the SPY ETF. In a sense, performance charts are useful in that they normalize
performance by comparing percentages instead of absolute values, making com-
parison across various markets and instruments more accessible and meaningful.
(To compare the relative percentage or ratio performance of two data series as a
function of price at each point rather than with the initial price of the observed
period, we resort to the use of relative or comparative strength charts.)
Figure 9.101 Relative Bearish Divergence between the Housing Index (PHLX) and
the SPY ETF.
Courtesy of Stockcharts.com