Divergences

7

7rader

Hi, this is a newbie question...but im looking at a stock right now where the price is steadily on a uptrend, but the slow stochastics are sloping downwards....a total divergence from what i see. I am looking at a weekly chart.

BUT im confused how to interpret this...WHAT DOES IT MEAN?

from a technical standpoint does it mean that the stock is strong and even at these price levels it is being oversold? and possibly a good pickup?

OR

Is this stock overbought and the stochastics are showing that this stock is ready to plumet?


thanks
 

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Most divergences, positive or negative, tend to resolve in a sharp, counter-trend move. The magnitude varies, and this negative divergence probably won't end with a bone-crushing cliff dive. The problem with the drawn out (time-wise) divergences, is that they take a while to unfold and when they do, they tend to be less spectacular than a divergence that unfolds over a short period of time. They're kind of weak.
 
You are not using the right indicator to determine a trend ending. Also, you are not using stoch correctly.

Quote from 7rader:

Hi, this is a newbie question...but im looking at a stock right now where the price is steadily on a uptrend, but the slow stochastics are sloping downwards....a total divergence from what i see. I am looking at a weekly chart.

BUT im confused how to interpret this...WHAT DOES IT MEAN?

from a technical standpoint does it mean that the stock is strong and even at these price levels it is being oversold? and possibly a good pickup?

OR

Is this stock overbought and the stochastics are showing that this stock is ready to plumet?


thanks
More...
 
A company that trains people to trade uses a method similar to your chart its called Traders International but their stochastics use a different setting. The prolbem is while the divergence warns you to a countrend move your entry will not be spectacular. I know TI will enter into a short position when the prices crosses lower than the swing low. Meaning your risk is higher than if you entered with other methods.

All in all you can expect 60 percent success rate but your risk reward will probably be 1 to 1.
 
This would be my take on the chart. You don't want to be looking at the divergence with a view to taking a short. If there is a counter trend move which is possible but it might also just unwind the divergence with some sideways action, you should be eyeing this chart to see if it pulls back with a view to start taking long positions.

Everyone loves a bit of divergence, but my strategy is to wait for the counter move if it comes, or wait until the indicator starts to pick up again and then this is the signal to take long positions with the original trend. Yeah it's not quite as exciting as spotting the divergence, taking the short and maybe have a winner, but it is the higher probability trade which in my view is what trading is all about.
 
Also, there is no suh thing as overbought in an uptrend or oversold in a downtrend. You want to be looking for oversold in an uptrend and overbought in a downtrend.

Use multiple timeframes. Have a longer term chart that defines the trend, then use a shorter timeframe to look for the pull backs and entry signals to get on board the trend of the bigger picture.

Good luck
 
thanks wood,

my intial thought on this chart was to be looking for a long. but i wasnt sure about how to read divergences, and i wanted to ask for a second opinion in case this divergence is a warning sign that the stock is weak
 
I notice in the case of DryShips Inc. stock symbol DRYS, on two occasions stochastic indicator shows negative divergence to price value trend followed by an upward trend from about $ 20 / share to $ 120 / share.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2520985 \img>
 

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