In technical
analysis, divergence occurs when a momentum indicator, like some oscillators,
starts to go the opposite direction compared to the price action. This
phenomenon shows a weakening in price momentum and signals possible pullbacks
or even change in trends. The most used indicators for divergence trading are
the RSI and the MACD.

 

There are
four types of divergence: bullish (positive), bearish (negative), hidden
bullish (positive) and hidden bearish (negative). The bullish (positive)
divergence occurs when the price makes a new low, but the oscillator makes a
high compared to the previous data. On the other hand, a bearish (negative)
divergence occurs when the price makes a new high, but the oscillator makes a
low compared to the previous data. These two types of divergence are also
called regular.

Divergence using the
MACD

 

The bullish
(positive) hidden divergence happens when in uptrend the price makes a higher
low, but the oscillator makes a lower low. On the other hand, a bearish
(negative) hidden divergence happens when in a downtrend the price makes a
lower high, but the oscillator makes a higher high. The hidden divergence can
signal a continuation of the trend.

Divergence using the
RSI

 

As
previously mentioned, regular divergence signals a weakening momentum, and the
price can either pullback or change completely the trend. There are different
targets where the price can go to once a divergence works out. The first target
is generally the previous swing point or a trendline and instead of taking a
risky counter-trend trade you can use this opportunity to wait for the price to
pullback to the swing point or the trendline and then trade a continuation of
the original trend. Below you can see some examples where divergent price
action pullbacks to trendlines and swing point before continuing the upside
trend.

Divergent price action
pullbacks

 

Another
target of the regular divergence is the last swing point that technically
defines a trend. Once the price breaks out of that swing point, the trend is
said to be changed on that specific timeframe. Below you can see an example
where the price pullbacks all the way up to that last swing point and then gets
rejected almost perfectly before continuing the original downtrend. Again,
instead of trying to catch the point when the price starts to go all the way up
to the swing point, you can wait for it to complete the run and then entering
in anticipation of the continuation of the trend to catch bigger moves and to
limit better risk.

Last swing point as
divergence target

 

The last
usual target of the regular divergence can be the last swing point that began
an entire divergent move. This generally happens with a chart pattern called
wedge, which is divergent in nature.

 

The price
goes up/down slowly with pullbacks getting smaller and smaller and the
oscillator signalling a weakening momentum for the entire move which at some
point just breaks out and goes all the way back to the swing point when the
divergence started to occur. Below you can see an example of a wedge type
divergence and the price pulling all the way back to the swing point when the
divergence began. Curious fact is that before continuing the upside trend,
there was another divergence that could confirm that level as a possible
support for a continuation trade.

 

 

To sum up,
divergence is a nice and handy technical analysis concept which can help in
risk management and even timing. As you saw from previous examples, it’s not
used on its own but complemented with other technical concepts like swing levels,
trendlines and so on to give more structure.

 

This article
was written by Giuseppe Dellamotta.

Some profit-taking in the recent dollar rally is the most plausible argument for the price action in FX today as we see the greenback lag across the board.
The dollar has had a stellar month of trading in April so seeing some slight corrective action isn’t the most surprising thing. That said, with month-end in focus today, it does make it fairly tricky to interpret the moves.
EUR/USD is up 0.8% to 1.0575 but in the context of the bigger picture, it doesn’t mean much:

The pair is still pressured on a break below the 2020 low of 1.0635 and near-term resistance in the form of the 100-hour moving average is only seen at 1.0610. Buyers will have to break past those levels to really justify of any deeper correction.
Meanwhile, GBP/USD is up over 100 pips on the day to 1.2560 levels but it also isn’t indicative of much as outlined earlier here.
Elsewhere, USD/JPY did drop briefly below 130.00 but dip buyers are showing their appetite once again by quickly buying up the pair to be around 130.30-40 levels at the moment:

Prior +7.6%HICP +0.7% vs +0.4% m/m expectedPrior +2.5%CPI +7.4% vs +7.2% y/y expectedPrior +7.3%CPI +0.8% vs +0.6% m/m expectedPrior +2.5%It may not be the biggest of increases but German annual inflation did indeed creep higher again in April and that just continues to put further pressure on the ECB. While there are certain proxies in the region suggesting that inflation may be peaking, it doesn’t look to be the case in Germany just yet and even so, it doesn’t look like we will see price pressures cool off materially at least.The two main culprits are once again surging energy prices and also higher prices of raw materials, plagued by supply chain disruptions.The month-on-month readings also continue to suggest stronger cost pressures in general, which will not be of much comfort if the trend continues even as annual inflation may be close to hitting a plateau.

Headlines:USD/JPY up 2% to 131.00 as yen capitulates furtherUSD/JPY hits 130.00 for the first time in 20 yearsBOJ plays a dangerous game, yen lock and loaded for the next leg lowerBOJ’s Kuroda: Desirable for currency to move stably reflecting economic fundamentalsBOJ’s Kuroda reaffirms bond market operations is to ensure cap on 10-year yields targetBOJ’s Kuroda: Consecutive bond buying operations is to avoid speculative market movesThe dollar is on a rampageNo red line being drawn yet on the yuan’s plungeSaxony April CPI +7.2% vs +7.0% y/y priorSpain April preliminary CPI +8.4% vs +9.0% y/y expectedOPEC+ said to be likely to stick with existing deal at next week’s meetingMarkets:USD leads, JPY lags on the dayEuropean equities higher; S&P 500 futures up 1.5%US 10-year yields up 0.4 bps to 2.822%Gold up 0.2% to $1,889.60WTI down 0.5% to $101.52Bitcoin up 1.4% to $39,682It’s all about the dollar again today with the yen’s capitulation also part of the picture, as the BOJ opts to maintain its yield curve control policy. That sent USD/JPY skyrocketing to its highest in two decades, with the pair rising above 130.00 to briefly clip 131.00 and is holding just below that now.The greenback’s strength was evident in the handover from Asia to Europe, helped by a continued depreciation in the Chinese yuan. Again, I feel this is something that many aren’t talking about but it is worth noting as it is feeding to further dollar gains this week.In that lieu, I’d argue the plunge in the yuan is also partly weighing on the aussie and kiwi – which are both struggling heavily today despite better equities sentiment.AUD/USD is down 0.5% to 0.7080 levels, as sellers eye a potential move towards 0.7000 again while NZD/USD is down 1.1% to 0.6470 levels, which is the weakest since July 2020.Meanwhile, EUR/USD is being pressured below 1.0500 as it trades to fresh five-year lows while GBP/USD is down another 110 pips to 1.2438 as the pound continues its freefall against the dollar.The bond market is taking a bit of a breather while equities are seeing a solid bounce to try and salvage some pride after what has been a torrid month of trading so far for stocks. European indices are holding gains well above 1% while US futures are also pointing to a solid open, helped by Meta’s earnings beat yesterday.

That means OPEC+ will agree to another 432k bpd oil output increase for June. The bloc is scheduled to meet on 5 May, so mark that in your calendars. That said, with the lack of enthusiasm to address the elephant in the room, OPEC+ meetings these days have been a real bore.But you can’t really blame them for being satisfied with oil prices at over $100 now, can you?

It didn’t take long for the dollar to regain its footing as it is now putting the pedal to the metal once again. EUR/USD is back down 0.5% to 1.0500 and GBP/USD is making fresh lows on the day, down 0.6% to 1.2465. I outlined the charts for both earlier here.Meanwhile, the aussie and kiwi have also lost ground with AUD/USD down 0.5% to 0.7090 and NZD/USD down 1.0% to 0.6475. I highlighted their respective technical predicaments earlier here.USD/JPY is also still sticking above 130.00 around 130.30-50 levels after briefly clipping 131.00.I talked more on the dollar’s rampaging run earlier in these posts:The dollar is on a rampageNo red line being drawn yet on the yuan’s plungeBOJ plays a dangerous game, yen lock and loaded for the next leg lowerDollar funding looking rather tight as of late

Nothing significant to really take note of for the day, as the dollar continues to surge higher across the board.The interesting thing to be aware of is again that there are no major expiries seen in and around USD/JPY on the way up, so that leaves plenty of room for price to roam more freely – at least one can interpret it that way.As mentioned earlier in the week, the dollar is pretty much in a league of its own at the moment and there isn’t much to really shake things up before the FOMC meeting on 4 May next week.For more information on how to use this data, you may refer to this post here.

Tesla’s drag was a key talking point yesterday as tech stocks were hammered with the Nasdaq falling near 4%. The chart doesn’t paint a pretty picture with the index down by over 20% now since the turn of the year:

The support from the 38.2 retracement level @ 12,552 is the key one to watch this week with the March 2021 low @ 12,397 adding to some additional downside buffer. But break that region and things could get even uglier and in such a scenario, I can’t see how that would not spillover and impact broader market sentiment.For now, things are calmer heading into the US session but the earlier optimism has certainly been snuffed out. Nasdaq futures are up 0.1% after having been up by around 0.8%. S&P 500 futures are up 0.5% but part of the gains owes to value stocks with Dow futures seen up 0.7%.

Prior -5.0%
Market index 343.1 vs 374.0 prior
Purchase index 234.7 vs 254.0 prior
Refinancing index 930.7 vs 1,023.2 prior
30-year mortgage rate 5.37% vs 5.20% prior

The average rate of the most popular US home loan jumps to its highest since June 2009 and the rising costs have certainly weighed on demand conditions, as mortgage activity slumped heavily once again. The purchase index has fallen to its lowest since May 2020 while the refinancing index is down to its weakest since January 2019.

London-based MFP Trading’s latest algorithmic-based product allows clients to trade without paying the spread. By leveraging high-end technology, Minerva turns hedging from a cost centre to a profit engine. MFP will be showcasing their latest tool, ideal for Retail FX and CFD brokers, at the upcoming iFX EXPO which will take place in Limassol, Cyprus, from 7-9 June 2022. What is Minerva? The issue of how Retail FX and CFD brokers can offload mismatched risk in their trading books without giving up all their spread (or at least a good portion of it) has long been debated within the trading industry.  MFP Trading’s new product, Minerva, acts on these concerns in a bid to deliver the easiest and most profitable strategies possible. Hedging methods are constantly questioned. After all, seeing tight spreads means money is being left on the table. If LPs are keen to see your flow, it means they can monetize it easily.  After looking at the attrition curves of hedge trades with the MFP quant team, you can decide which flow you should be managing, like a top-tier bank market maker using Minerva passive mid spread matching, and which flow you should externalise quickly on an Agency “A Book” typical model.  From there, thanks to its powerful order management system, Minerva FX makes it possible to monetise this information by placing orders at the right level automatically instead of paying the spread. Go beyond A & B book and use Minerva to create an intermediate book. How Does Minerva Function? Minerva is a key cog in a well-oiled machine, with the system allowing you to enter your hedging rules into its core. It then automatically inputs orders at the mid-market into MFP Trading institutional ECN (eg,10.5 in a 10/11 market).  MFP will then display this order to its institutional customer base making sure that the order is at the top of each institutional customer aggregator, so they will deal with Minerva’s order in priority. This process maximises trade matches and, more importantly, maximises revenues generated on the trades.  In the end, Minerva’s client will trade at a better price for his hedges and MFP will share the brokerage it captured from institutional clients to Minerva’s user. Minerva’s users will then see both price improvements on their trades and will get a monthly brokerage check from MFP. Why Choose Minerva Technology? Minerva technology is extremely advanced, with very few technology firms offering a solution of the same calibre. Minerva was also built under the supervision of a quant who used to work in both top-tier banks and high-frequency trading firms. As a result, the trading algos have been tested many times to ensure they’re reliable and robust. What’s finally great about Minerva is that it’s a huge part of MFP’s ECN institutional trading infrastructure and is therefore offered for free to MFP users. As a result, this simple, one-stop setup makes it easy for Minerva users to immediately monetise the product, without breaking budget. iFX EXPO Limassol Presence Those interested in the MFP’s advanced Minerva product should attend the FX company’s workshop at the upcoming iFX EXPO in Limassol Cyprus this June.  Hosted by Ultimate Fintech, this is the largest financial B2B expo and is set to attract thousands of like-minded contributors and attendees including brokers looking for advanced tech products.  You can also register for a Minerva demo via the MFP Trading website for a more detailed glimpse into how this technology could streamline your processes. Don’t pay the spread, earn it and maximise revenues per client.