Ex. 1 - Long Term Divergence

In this section we are trying to introduce the Accumulation/Distribution in a loose way to show its application. We will look at the EUR/USD pair on daily graphs in certain times from 2003-2006 and explain what the A/D indicator tells us about the trends we come across.

1. Price and A/D rise in unison in April and May, forming what seems like a triple top formation in June. This represents a healthy trend; traders are buying Euros as the price of Euros is going up. There is convergence between the price action and the technical indicator.
   
   
2. From mid June to the end of August, price of the pair heads down as Dollar bulls sell the EUR/USD pair and “buy” Dollars. The two and a half months see a rather large movement of 1000 pips.
   
   
3. If one focuses on the A/D line however, it does not show the same downward trend as price. In the beginning of the downward move, A/D falls, but with the start of July the AD line stays flat and moves in a sideways direction.
   
   
4. Even though one can make the case that the highs of the A/D are decreasing along with price, the lows of the A/D (when Dollar buying is materializing) stay flat. This is most obvious when comparing the pair’s fall in the second half of August to the previous A/D lows. The implication from the A/D indicator is that the downtrend is not long lasting as price action is diverging from the indicator. The selling volume associated with a healthy downtrend does not materialize.
   
   
5. When the pair starts heading up again, it reaches its old A/D level quickly and then surpasses it. The uptrend starts as a 1000 pip move in mostly one month.

If we look further, the uptrend that started in September/October pauses and drops in mid-October/November. Notice that the A/D line follows this fall. The implication here could be that those that were on the right side of the uptrend sold the pair to take profits. Afterwards the pair advances higher reaching 1.2800 by the end of the year. This converges with A/D.

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