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Positive divergence in Relative Strength Index suggests buying REC shares

Positive divergence in Relative Strength Index suggests buying REC shares
August 10
13:29 2019

Shabbir Kayyumi

RSI stands for Relative Strength Index. It is a momentous oscillator used to identify trend reversal.

If in a downtrend RSI is making higher highs and higher lows while the price is making lower highs and lower lows, it is termed as ‘Positive Divergence’. Under technical analysis, positive divergence in RSI is considered bullish particularly if it is accompanied by other technical indicators that suggest bullishness.

Why buy Rural Electrification Corp (RECL)?

Daily chart of REC is showing RSI (14 days) positive divergence and stochastic too is showing positive momentum ahead.

rec

Buy Signal

1. Recent swing bottom (128.70) is lower than the previous swing bottom (134.60), signifies lower bottom formation.
2. Recent RSI swing bottom (35) is higher than the previous bottom (29) shows higher bottom formation, called as ‘Positive divergence’.
3. Strong bullish candle formation must exist after the recent swing bottom suggests bullish price action in progress. (Opening Morubozu is showing strength in RECL)
4. Positive bias means bullish candle must close above the bearish trend candle which is 136.70 in case of RECL.

5. Stochastic %K (41) is greater than %D (31) Justifying upside momentum too.

Profit Booking:-

• Whenever price candle will be near previous swing high which is near Rs 155 levels.

Stop Loss:-

• Entire bullish view negates on breaching of low of swing bottom candle and one should exit from a long position. In the case of RECL, it is (128.70).

Conclusion

RSI divergence suggests buying RECL around Rs 138 -142 levels with a stop loss of Rs 128 for higher targets of Rs 155 and 170 levels.

The Author is Head – Technical & Derivative Research at Narnolia Financial Advisors.

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