Relative Strength Analysis
and is thus a bearish indication. There may be some underlying weakness in the
stock. Again, all moves in the stock must be confirmed by price.
Figure 24.9 depicts bullish divergence between the RS line and price. It shows
that although the stock is making lower troughs, it is outperforming the market
and is thus a bullish indication. There may be some underlying strength in the
stock. As usual, all moves in the stock must be confirmed by price.
Figure 24.10 shows Google Inc. and its RS line, with respect to the S&P500
Index (Google/S&P500). We observe bearish divergence between Google and
its RS line, which indicates a potential weakening in prices since Google is seen
underperforming the broad market. Price finally declined, with price breaching an
uptrend line, representing price confirmation.
Divergence may also be found by comparing the percentage or ratio performance
of two or more price ratio charts from a common reference point or time line.
These are also popularly referred to as performance charts. Figure 24.11 depicts
bearish divergence between Gold and the Gold Miners and Gold Bugs Index.figure 24.8 Standard Bearish Divergence between the RS Line and Price.figure 24.9 Standard Bullish Divergence between the RS Line and Price.