The diverging pattern

The indicator combination shines when a price downtrend is in progress and they form a divergence. The Adx rises as it identifies the trend, while the Macd falls below its trigger line and often below its zero line. The two indicators no longer move in tandem; instead, they diverge and form almost a mirror image of each other. During the severe 2000-01 decline in Cisco Systems (Csco), the Adx-Macd combination formed several easily identifiable diverging patterns as one rose and the other fell (Figure 3). They reflected the falling prices in September-october and December 2000 time periods, as well as the continuing decline in February-March 2001.

The diverging indicator pattern should warn those who want to go bullish to stay out of a stock. However, for those who wish to sell stocks short or purchase put options, the diverging pattern provides a visual gold mine. But expect a price shift when the indicators stop moving apart and begin to move toward each other (as they did in April and May).

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