Technical Analysis

Divergence Example 2

Here is a second example of a longer-term divergence.

1. EUR/USD is in an uptrend to start January. Price moves up and so does OBV.
   • The upward trendline is violated around the 8th.
     
2. Afterwards from Jan 8th through the 14th price moves into a channel between 1.2150 and 1.2000. OBV starts moving sideways also, but with higher lows, and lower highs, in a triangular pattern of consolidation.


3. On the 17th the OBV trendline is broken and heads down. Price continues going sideways, this time in an even tighter range. The fact that the OBV indicator is heading down implies that there is less interest in the Euro.


4. On the 20th the OBV trendline is cut, giving a buy signal or a Euro long. The trendline break would be a good leading signal as the pair breaks upward clearing the resistance of the trading range.


5. However as price reaches a new high on the 23rd, the OBV indicator fails to reach higher than the older OBV peak on the 11th and 13th. Looking at a longer perspective the higher price, but lower OBV creates a bearish divergence.


6. The next two peaks of OBV, which are highlighted, reinforce the divergence and price soon follows the OBV indicator and falls. A little later we are given a sell trendline break on the OBV indicator. The fall continues into February and reaches 1.1850 before forming a temporary bottom.
   • The move from the market top at 1.2275 (and the bearish divergence) to 1.1850 is a span of 425 pips or $4,250 in 20 days.
   • To see for yourself the rest of February’s downtrend, check our online interactive charts or from VT Trader. 

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