It is quite common to see price/momentum divergence at important market tops and bottoms. Here we take a look at two back-to-back occurrences in the OMX Stockholm 30 Index (.OMXS). In the past 6 months we observed the completion of two five wave counts. Starting from the September 29 bottom, price escalated in a choppy, overlapping fashion. The bottom panel of the chart shows how the Relative Strength Index (RSI) touched just above the 70 level on November 4. The final fifth wave move up registered a higher high and a higher close compared to wave 3, yet the RSI never reached 70. This divergence increased our confidence in the sell signal at the break of the 0-4 line on December 4.
Prices fell steadily during the next two months. Looking at the chart the lowest close in wave 3 down came in conjunction with the RSI low on January 20. However, as prices continued to decline in wave 5 down, the momentum did not fall along. On February 16 the index gapped higher and broke above the down sloping 0-4 line triggering a buy signal. Once again the price/momentum divergence elevated our confidence in the signal. While divergence is not a self sufficient indicator to enter a trade it can give you an idea of where you might be at within the overall wave structure and highlight potential market turning points.