Blog Post On: 6/18/2009

When the book "Trading For a Living" was first published by Dr. Elder I picked up a copy like many other aspiring traders/investors.  His book was the most eye opening look at technical analysis that I have seen to date. Dr. Elder's recent book "Come Into My Trading Room" is equally impressive. 

Elder uses a "Triple Screen" technique to analyze the markets. He tells readers that primarily look at daily charts to use a "factor of five" and go up to the next level of charts. In this case a weekly chart.

One feature that I have always used after reading trading for a living was the fact that Elder emphasized that Indicator Divergence from Price is very powerful signal, especially on a weekly chart and this signal may only happen once a year. This can be an early signal to go LONG or SHORT. In other words when prices reach a lower low, but an indicator (RSI, MACD Histogram, Stochastic) reach a higher high it is time to go long. The reverse is also true.

Late 2007: When the stock market in late 2007 reached an all time high there was a Bearish Divergence between price and RSI. This signaled the uptrend was about over. 

Recent Bear Market Lows of March 2009: Here we see a Bullish Divergence pattern emerge. Prices reached a lower low while RSI and MACD Histogram trended higher. What came next? We all know a very powerful rally.

More recently we can see there was a Bearish Divergence on the S&P 500 Daily chart showing that a pull back was in order. The weekly chart though still shows the trend was up. This may indicate that the recent pull back may return to new highs. If that is the case we can be on the lookout for a Bearish Divergence and may be a good shorting opportunity.

Pick up a copy of Come Into My Trading Room. It is well worth the price.