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Shreyas Nevatia sent me an email saying:
Sir
I am an avid reader of your blog and advice on moneycontrol.com. In Nifty daily chart, there is divergence on RSI indicator. Please give your views
My Notes: Indicator divergences are not meaningful trading signals. They have to be taken in context of price action. A bearish divergence comes when prices are making higher highs and RSI (in this case) is making lower highs. A number of thoughts come up.
How can higher highs be bearish?
What is closer to the market: Price or a mathematically calculated number?
Are we looking at the same chart – same indicator with similar lookback periods?
Assuming that a divergence leads to lower prices, then the question is: for how many days? On my chart with a 14 period RSI plotted on end of day data, there was a clear bearish divergence that was identified on December 20, 12. The next day, prices fell to 5830, which was a low of the two day correction. From this low, the Nifty has rallied about 200 points.
This probably tells you that I am not a fan of divergences. Prices are the best guide for me.
But, I am grateful to Shreyas for raising a relevant question of theory. I enjoy answering such questions.
Rationale behind my Calls
I often get emails and comments in this bog, asking me why I gave so and so call on CNBC-TV18.
My trading style is a mix of traditional technical analysis derived from Edwards & Maggee and Wyckoff.
I have found this style to be in tune with my psychology. This means that I am comfortable with my analysis.
Every chart, every instrument can be analyzed with a variety of methods. If the method is used with consistency, properly managing the trade risk, then it will make money. This means, we can have different ways of analysis, but all of us can make money, provided we are consistent + manage our risk.
When the ways of market analysis are almost infinite, there is no need to explain my work, because you may have a different view point and both of us may be correct (means be profitable).