AIV – An Example of an Explosive Divergence Resolution

Jan 26, 2008: 2:30 PM CST

It’s always great to see the resolution of a classic trade, if for nothing else than for an educational resource.

AIV (Apartment Investment and Management Co) recently resolved a lengthy buy divergence in a fierce way:

Typically, divergence trades are only good for a small, counter-trend target, but lengthy, multiple swing divergences can frequently precede explosive moves out of equilibrium and even precede trend reversals as well.

To highlight a divergence, observe your favorite momentum oscillator (Rate of Change, RSI, MACD) and compare swing highs and swing lows in price with swing highs and lows in the oscillator.

Try to look beyond what the classic textbooks teach and use oscillators in non-traditional ways.

Recall also that divergences are counter-trend by nature, but can often lead to great profits if identified early.

At the minimum, you should probably exit any longer term trades should you observe lengthy divergences. Like a coiled spring, you never know when or with how much force the price will ‘snap.’

4 Comments

4 Responses to “AIV – An Example of an Explosive Divergence Resolution”

  1. Sue Massey Says:

    I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.

    – Sue.

  2. ainkurn Says:

    very interesting post Corey… do you use these divergences in your normal swing trading arsenal?

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  4. Corey Rosenbloom Says:

    Anikurn,

    I do use divergences as trade setups, but mostly I use them for daily chart analysis.

    To me, divergences indicate a loss of momentum on the side of one market force, or a pick-up (increase) on the other side. Either way, I know that the most recent swing was weaker than the previous swing, and I can at least get a small target by fading the recent weaker swing back to my target of the 20 period MA.

    Lengthy (multiple swing) divergences often precede a trend reversal, but not with enough probability to enter a reversal style “large target” trade until the actual reversal is complete.