June 24, 2014
 

Energy Select Sector SPDR (XLE)

SIX reversal signals

1. Bearish divergence on MACD histogram: In area A the XLE rallied to a new bull market high and MACD-Histogram rallied with it, rising above its previous peak and showing that bulls were extremely strong. This indicated that the price peak A was likely to be retested or exceeded. In area B, MACD-H fell below its centerline, ‘breaking the back of the bull.’ This is a fairly common target for bull market breaks. In area C, XLE rallied to a new bull market high, but the rally of MACD-H was feeble, reflecting the bulls’ weakness. Its downtick from peak C completed a bearish divergence, giving a strong sell signal. 

2. Doji at the top: Yesterday's price action printed a Doji candle at Fibonacci resistance $101.63 

3. Moving Average breakdown: Price breakdown the 5MA-day, DEMA 21 and Fibonacci decade number $100 all in one day with good volume

4. 
Unusual high volume: Today's volume ticked up 50% above his 50-day moving average

5. DMI directional divergence: +ID and -ID pull back from top and bottom with a "v" shape. both directional heading at the same time to the center for a crossover is bearish signal

6. First red Heikin Ashi: We got today the very first Heikin Ashi red candle after 23 green Heikin Ashi candles

 


Final thoughts.


There is no perfect signal in technical analysis. Even normally reliable divergences can fail. Prices may fail to drop following a bearish divergence, but rally instead, hitting our protective stop. Whenever that happens, I continue to watch MACD-Histogram; as long as it does not rise above the last level of its first histogram decline, I consider a divergence intact.


Additional disclosure:

I entered short today when MACD-Histogram ticked down from its second top and I am placing a protective stop at Fibonacci $100.10.


Sources: Elder, Dr Alexander (2012-01-07). Two Roads Diverged: Trading Divergences (Trading with Dr Elder) (Kindle Locations 119-122). elder.com. Kindle Edition.

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