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Will RSI Negative Divergence Lead to Lower Prices?

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Take a look at these charts.

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The negative divergence between the RSI and price meanders on. The divergence that began on August 4, 2009 has been in effect for 132 days. The peak price move higher since the divergence confirmation (lower high in RSI and higher high in price) on September 23, 2009 has been 44 points.


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Will the current negative divergence lead to lower prices? In the bull market run between October 2002 and October 2007, I identified six RSI negative divergences on a daily chart of the S&P 500 that started at or above the RSI overbought line.

In each case the negative divergence resolved with the RSI touching or dipping below the oversold line on a closing basis.

During this time period there were no instances of a negative divergence starting above the overbought line that resolved with the RSI reaching a higher RSI level before reaching the oversold line.

The date and length of each RSI negative divergence and the peak price move higher from the divergence confirmation (lower high in RSI and higher high in price) are shown below:

  • 04-26-07 to 07-16-07 = 50 days: Price gain from divergence confirmation (05-09-07) in the RSI to the end of the divergence = 54

  • 10-26-06 to 02-02-07 = 117 days: Price gain from divergence confirmation (11-23-06) in the RSI to the end of the divergence = 53

  • 11-28-05 to 05-09-06 = 163 days: Price gain from divergence confirmation (12-14-05) in the RSI to the end of the divergence = 47

  • 06-17-05 to 09-12-05 = 81days: Price gain from divergence confirmation (07-28-05) in the RSI to the end of the divergence = 0

  • 11-24-04 to 03-07-05 = 103 days: Price gain from divergence confirmation (01-03-05) in the RSI to the end of the divergence = 19

  • 01-08-04 to 03-05-04 = 56 days: Price gain from divergence confirmation (01-26-04) in the RSI to the end of the divergence = 9


A couple of interesting points derived from the data above are that for roughly a third of that entire bull market period, the RSI was diverging from price. and once a negative divergence was confirmed, price gained very little until the divergence was resolved.

In every instance, the negative divergence was resolved by lower prices. Incidentally, if you bought the price trend line break following each negative divergence and sold at the first close when the RSI was at or below the oversold line (30) as indicated on the charts below, you'd have made a profit each time.

On a side note, the first chart showing the period immediately prior to the October 2007 top shows that the last wave up on a daily chart didn't have a negative divergence from price. In fact, it started with a positive divergence. (However, the RSI peak was lower than the previous two peaks on a weekly chart).


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In summary, based on 100% outcome in the last bull market there's a very high probability that the current RSI divergence will lead to lower prices, to at least the point where the RSI crosses the oversold line.

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No positions in stocks mentioned.

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