The market finished extremely bullish, pushing the S&P 500 up to the top of the channel. The slow stochastic is overbought, but the fast stochastic did pull back below the 80 line, setting up a possible bearish divergence. The price has made a higher high and if we get a lower high on the stochastic there would be a bearish divergence signal. Can’t wait to see what happens.
How to Spot a Stochastic Divergence
Once you know what to look for, it’s easy to spot a divergence.
A bullish divergence will have a lower low in price and a higher low in the stochastic.
The main criteria for the stochastic is that the first low should be below the 20 line and the higher low should be above the 20 line. This signals a change in momentum.
Divergences happen often and the signal is stronger when you combine it with other indicators.
Candles, trend lines, and time intervals all help determine how likely it is for the signal to be true. A strong signal will usually have 3 indicators.
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