DAVIN met the volume required today for a successful breakout, However, although volume broke out, price and RSI did not. At 2.70, a bearish RSI divergence was evident. For a successful breakout, RSI, price and volume must exceed previous levels. In my humble opinion, today’s volume could possibly be a blow off, since price reached a higher high intraday and volume was significantly higher. The price and volume on the next trading day may verify or contradict this possibility. The chart below is DAVIN’s daily chart.
A look into the 5 minute charts shows that the bullish price action was supported up until 2.70. However, a bearish volume and RSI divergence started to appear thereafter . The divergence was present from 2:00 pm to 2:50 pm, until a sell off occurred on increased volumes. The intraday gap from 1.88 to 1.98 was left unfilled .
A bearish RSI divergence is a signal for a trader to exit a trade while a bullish RSI divergence is a signal to enter. Traders must be able to spot these signs before the crowd does.
The Relative Strength index measures the speed and change of price movements. It is calculated using the formula:
RSI= 100- (100 /1 + RS)
RS= Average Gain/ Average Loss
RSI is 100 when the Average Loss equals zero (there were no losses to measure). This means prices moved higher for the time period set in the RSI settings, for example, 14 or 30. Conversely, RSI is 0 if the average gain is 0. No gains were measured. Thus , a stock is generally considered stronger when the RSI is higher.
“According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum.”