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Figure 16-6
Bearish Divergence |
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Key:
a Price is at 123.0, RSI is at 58.0
b Price is at 121.0, RSI is at 54.0
c Price is at 119.0, RSI is at 49.0
d Price is at 120.0, RSI is at 56.0
e Price is at 119.5, RSI is at 52.0
f Price is at 121.5, RSI is at 55.0
g Price is at 125.0, RSI is at 57.0 |
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is that when the RSI is at 60, there is a 40 percent chance that the RSI will continue up. If the oscillator value is at 81, there is only a 19 percent chance that it could continue on up. To date, I have never seen a market in which the bulls were able to get the RSI much above 90. It is important to remember that in a strongly up-trending market a momentum oscillator will become overbought (above 70) or oversold (under 30) and will remain overbought/oversold while prices continue much higher/lower. Typically when the RSI or any momentum oscillator becomes overextended, any slight price movement in the opposite direction of the primary trend will be magnified by the oscillator, while any price movement in the original direction of the primary trend is suppressed. Typically this type of price or momentum movement creates a divergence between the behavior of price versus RSI. This is easily seen in Figure 16-5 in early June. Bonds made a new high with the RSI rallying to just under 80 (point x). Fourteen days later the price once again was at the same level as previously, yet the RSI value (point g) was under 70. Subsequently, price declined into mid-July retracing a percentage |
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