Why is the indicator going down?
What does indicator convergence or divergence relative to price imply? In the last blog post I tried to highlight that the indicator doesn’t measure price direction, but rather relative performance, as compared to other assets.
Here I’ll show you an actual example of that.
Consider the two images below. The charts both show the same time period, but for the first we can see that the indicator value is going up together with the asset price during the first half before reducing thereafter. Second chart clearly show the indicator reducing while the asset price is increasing in its first half period.
So what’s happening?
As said, it’s a relative indicator, and Parsley Energy is among the best performers during the first period, so we rank this asset higher than most other assets.
For Lockheed Martin, even if the price is going up on this asset as well, its performance is weaker than most other assets, which is why we rank this asset in the bottom half rank range.
In the second half we can see these roles starting to shift, as Parsley Energy fails to keep its performance going. At that point Lockheed Martin’s continued price increase starts ranking better than the other assets.