thE hAnDbook of tEchnicAL AnALySiS9.6.2 examples of price to Overlay
indicator Divergence
In this section, we shall examine divergence between price and various overlay
indicators.
9.6.2.1 examples of price to Moving average Divergence The amount of
divergence between price and its own moving average plays a key role in the
forecasting of potential reversal and continuations in the market. To determine
the amount of divergence present, we detrend price with its moving average in the
same way that the MACD is created, which is by detrending two moving averages.
In Figure 9.102, a price oscillator was used to isolate and quantify the amount of
divergence between price and its moving average. (The MACD was used in the
example below with a period setting of 1 for price and 100 for the exponential
moving average that we would like to observe.) One advantage of using a price
oscillator is that it identifies the potential overbought and oversold levels in the
stock, as indicated from 1 to 5. Notice that the projected overbought and oversold
levels coincide with bottoms and tops in the stock.
9.6.3 examples of Overlay to Overlay indicator
Divergence
In this section, we shall examine divergences between three popular overlay indi-
cators, namely moving averages, Bollinger Bands, and regression lines.
Figure 9.102 Forecasting Reversals in GE via Overbought and Oversold Levels in
the Price Oscillator.
Courtesy of Stockcharts.com